As I was checking for today’s news on Bloomberg, this article caught my eye. In a world grappling with the pressures of inflation, Japanese businesses face a unique challenge: they don’t know how to ask for higher prices. Decades of deflation have left many smaller companies without the skills or strategies needed to navigate the rising costs seen globally. While inflation prompts businesses in other countries to raise prices, or engage in shrinkflation, Japanese firms, especially smaller ones, find themselves at a significant disadvantage.
Deflation vs. Inflation
Deflation is a period where prices continuously drop, which might seem beneficial for consumers initially. However, prolonged deflation can cripple an economy. Companies unable to raise prices see their profits stagnate, and consequently, they can’t afford to increase wages. This leads to a vicious cycle of reduced consumer spending power and a sluggish economy. Japan has been dealing with this issue for years, particularly since the early 1990s.
Inflation, conversely, involves rising prices. Moderate inflation is generally seen as healthy for an economy as it encourages spending and investment. However, after years of deflation, Japanese businesses are ill-prepared to handle inflation effectively. They lack the experience and confidence to pass on increased costs to consumers, a crucial step for maintaining profitability in an inflationary environment.
The Inability to Raise Prices
The core issue for Japanese businesses is their inability to raise prices. Decades of deflation have ingrained a cultural and business mindset that increasing prices is unacceptable. In Japan, asking for higher prices can be seen as greedy, making it socially and culturally challenging to implement price increases.
Many smaller companies face immense pressure from larger firms to keep prices low. This resistance has left many businesses without the necessary skills to negotiate higher prices effectively. As a result, these companies struggle to pass on the rising costs of raw materials and other inputs to their customers. Without the ability to increase prices, profit margins shrink, threatening the survival of many smaller firms.
The Impact on Wage-Price Cycles
A healthy wage-price cycle is essential for sustained economic growth. This cycle involves companies raising prices, leading to higher revenues. In turn, they can afford to increase wages, boosting consumer spending. Increased consumer spending drives further economic activity, creating a positive feedback loop.
In Japan, this cycle is broken. Smaller companies cannot raise prices, so they cannot afford to increase wages. Without wage growth, consumer spending remains weak, preventing the cycle from taking root. This stagnation hampers economic recovery and growth.
Learning to Ask for More
Recognizing the need for change, some Japanese businesses are taking proactive steps. Managers and salespeople are attending classes on negotiating higher prices. These classes aim to teach essential negotiation skills, such as understanding negotiation styles, setting clear goals, and preparing for different outcomes.
For companies facing rising costs for raw materials and components, these skills are crucial. By learning to effectively communicate the impact of rising costs on their bottom line, businesses can better justify price increases to their customers.
Government Support and Intervention
As it may seem, it’s a systemic issue! The Japanese government is also stepping in to help address this issue. The Japan Fair Trade Commission, which regulates competition and antitrust issues, has been actively supporting smaller businesses. The commission encourages companies to report any unfair practices by larger firms that make it impossible to negotiate prices.
In recent years, the commission has publicly reprimanded several large corporations for abusing their dominant bargaining positions. This naming and shaming tactic is aimed at creating a fairer business environment where smaller companies can negotiate better terms and raise prices when necessary.
The Global Perspective
While Japanese businesses struggle with raising prices, many other countries are dealing with the opposite problem: rapidly rising prices due to inflation. In the United States and Europe, businesses are accustomed to adjusting prices in response to market conditions. They have the tools and experience to navigate inflationary pressures effectively.
This stark contrast highlights the unique challenges faced by Japanese businesses. While companies worldwide are battling inflation, Japanese firms must overcome decades of deflationary conditioning to survive and thrive in the current economic landscape.
In Summary
The issue of raising prices is a complex challenge for Japanese businesses. Decades of deflation have left smaller companies unprepared to handle the inflationary pressures seen globally. By learning effective negotiation skills and receiving support from the government, these businesses can begin to navigate the difficult process of raising prices.
While the rest of the world deals with the direct impacts of inflation, Japanese firms face the added challenge of breaking free from a long-standing cultural resistance to price increases. With perseverance and adaptation, these businesses can hope to create a healthier economic environment, ensuring their survival and contributing to Japan’s overall economic recovery and growth.