MNI ANALYSIS: Retail Discounting Threat To BOJ CPI Target

By Max Sato

     TOKYO (MNI) - Retail discounting that is good for the Japanese consumer is

making the Bank of Japan's already difficult struggle to boost consumer prices

to a stable 2% level that much harder.

     It is unclear whether continued labor shortages and rising input prices

will force these retailers to reverse their discount policies and raise prices

in the near future.

     The wealth effect from rising stock markets has helped produce strong

demand that is boosting department store sales. But many households face

uncertainty over social security income and child-rearing support costs and so

look for bargains for daily necessities.

     On one hand, serious labor shortages have prompted Yamato Transport, a

leading home delivery firm, to raise prices for the first time in 27 years,

while Asahi Breweries said it was raising beer prices by about 10%, its first

price hike in 10 years.

     But on the other hand, many supermarket chains continue to offer discounts

on various household goods in response to customer needs, at least partially

offsetting the price hikes in other sectors.

     "No retailer sets prices by keeping the inflation target in mind," AEON

Holdings executive officer Kaori Miyake told reporters in August, when the

leading retailer group announced that it was lowering prices for 114 private

brand items by an average 10%.

     AEON Retail routinely offers discounts on daily necessities by reviewing

supply chains and procurement sources but the company is not just cutting prices

to survive tough competition in the industry, said Hiroko Kayano, general

manager of the firm's public relations department.

     "We are also seeking to improve the quality of our products by providing

various private brand series" she said. "Our customers have a keen eye for

products. They try to save on necessities and spend on their favorite goods."

     Consumers are demanding safer, healthier goods at reasonable prices, Kayano

said.

     Data from the Ministry of Health, Labour and Welfare's 2017 annual report

show 16.6% of the households whose heads are in their 40s had an annual income

of only under Y3 million in 2014 (the latest survey year), an improvement from

18.5% in 2012 but still larger than the 11.2% seen in 1994.

     In another indicator of income constraints, the ministry said the share of

surveyed households that had an annual income of under Y4 million rose to 47%

this year from 34% in 1994. A widening income gap and the growing number of

single households suggest more people will find themselves in a low-income

group.

     "Retail store chains are not trying to expand market share by cutting

prices regularly but they are simply responding to the reality that people

making Y3 million to Y4 million a year have to be frugal," a retail industry

source told MNI.

     Large retail chains have their own "private brand" goods that are designed

by them and produced at lower costs than national brands, enabling continued

discounting without causing losses, the source said.

     "Compared to other counties, Japan is in a unique situation where both wage

hikes and moves to pass higher costs onto prices are lagging behind the

improvement in the real economy," BOJ Governor Haruhiko Kuroda told reporters

Tuesday.

     There are no signs of price hikes at Japan's ubiquitous convenience stores,

which offer one-stop shopping for various age groups.

     In April, Seven-Eleven Japan stores cut prices for 60 daily goods including

detergent and toilet paper, whose prices had been set higher than those at

supermarkets and drugstores.

     The convenience store chain has no plans to raise prices even though labor

costs are rising, Timar Sandor, an official at the firm's public relations

department, told MNI.

     "We are making profits by selling higher-margin products such as fast food,

fresh food and drinks, and choosing venders for higher margins," he said. "Our

concept is to offer products with quality that differentiate from others."

     "We are also supporting our franchise stores to install better in-store

systems to increase the efficiency of their staff and reduce working hours."

     The BOJ has been keeping borrowing costs down for businesses and households

and trying to prompt investors into seeking higher returns by taking more risks,

in the hopes the wealth effect would prompt additional spending.

     But the portfolio effect of the BOJ's aggressive easing has had only a

limited impact on individual investors, while institutional investors have

shifted to equities from bonds and reduced their currency hedging for their

investments in foreign securities.

     "It is technically difficult for individual investors to reduce currency

hedging. There is also a problem of firms offering funds that can earn them the

highest commissions, making individual investors less willing to take risks,"

said a source familiar with the decision-making process at the central bank.

     "Risk aversion, combined with slow wage hikes, is keeping consumer spending

lackluster."

--MNI Tokyo Bureau; tel: +81 90-4670-5309; email: max.sato@marketnews.com

--MNI BEIJING Bureau; +1 202-371-2121; email: john.carter@mni-news.com

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