Japan’s Small Businesses Have a Problem. They Don’t Know How to Raise Prices

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It's a busy week for central bankers. In the UK, the Bank of England is poised to cut interest rates after getting inflation under control. In the United States, the Federal Reserve is expected to keep rates the same as it weighs up what's a bigger problem, prices or unemployment. And in Japan they're eyeing raising rates again after increasing them in March for the first time in seventeen years. Well, around the world, it's a Goldilocks situation. How to keep

On a sunny day in April in Montsuet, a small city on the western coast of Japan. A speaker stands at the front of a classroom, hands on the podium, encouraging the people in the room to stand up for themselves.

I scol you so at the core of Google last week. You have to make your voices hard. You know what I'm talking about. Right. I want you to raise your voice more and more.

The roughly twenty or so people in the classroom pay close attention, taking notes diligently from their seats, whilest some nod their heads as echo Kanonji, a veteran negotiator, continues on.

The goal of any negotiation is to find the best outcome for boss parties. Know your style, Understand whether you're coolly anriged goal or engaging Greek friendly.

It sounds like the kind of negotiating seminar or business class you might expect to find at a high school or college. But the people here today are not students. Many of them are managers and salespeople in their mid thirties and upwards. They work for small and medium sized businesses in Japan, and they've come here because they desperately need to learn a skill they haven't needed to use in ages, how to raise prices.

The tide is finally turning after thirty years, The power brands is changing. Now is your chance.

So why are people who have already been in business for years taking a class on how to raise prices now? Well after decades of prices pretty much standing still or falling in Japan. Things are starting to change. Costs are rising in Japan, and that's put small roller and medium sized companies in the country in a tricky spot.

So the smaller companies in Japan are getting squeezed because what's happening for them is that they're paying more for electricity, they're paying more for raw materials, parts and components.

Reed Stevenson is a senior editor at Bloomberg News based in Tokyo.

And then their employees are coming to them and saying, look, we have to spend more just to put food on the table every month. You know, can you raise our.

Wages to survive?

These businesses will need to raise their prices, and whether or not they are successful has huge implications for Japan's economy overall, because smaller medium sized businesses like these are a critical part of the Japanese economy.

They actually make up ninety percent of the companies in Japan and employ the vast majority of people.

And Japan's central Bank is really paying attention to what happens at these companies because after years of conventional monetary policy, the Bank of Japan believes the economy may finally be moving away from decades of deflation and towards some healthy price increases. They've already raised borrowing costs earlier this year, and this week they'll decide on whether they will raise rates again. Welcome to The Big Take Asia from Bloomberg News.

Once that bubble burst, essentially the Japanese government engineered what you can call an ultrasoft landing, So it took really more than a decade for all of that to be resolved, for bad loans to be written off, and by the end of that decade or at least a decade, plus, Japan found itself in a deflationary environment, and so prices were going down, and the central bank essentially stepped in and cut rates to zero and then to blow zero

But with rising raw material prices after the pandemic, a steadily weakening yen, and a mild economic recovery, prices are picking up again in Japan.

If you're a consumer, you're seeing this happen at the grocery store. So you're paying anywhere from maybe fifteen to twenty percent more for a carton of milk. You're paying more for vegetables, and consumers are feeling the pinch.

All of this has prompted the Bank of Japan or the boj to finally switch gears and move away from this notion of keeping interest rates below zero. In March, for the first time in seventeen years, the BOJ raised borrowing costs to zero, well between zero and zero point one percent, and Read says, what the BOJ is hoping to see here is this sort.

Of healthy cycle where higher wages feed into more spending, into a sort of robust but manageable level of inflation.

The idea is that if people make more money, they can afford to spend more, and so prices can go up.

So that you really get the economy essentially working like it used to many decades ago.

So I guess the big question is is the boj's plan of raising borrowing costs actually working so far?

This policy is working for the larger companies, especially if the export, because obviously they can command higher prices abroad where there are in fact quite significantly inflationary environments.

Essentially, what Reed is saying here is that big brands like Toyota or Uniclo or seventy eleven have an advantage because they can sell outside of Japan in places where prices are just generally higher right now because of inflation. So they can charge more for their products in those places and raise prices, and with higher prices, bigger companies have been able to pay their employees more.

For example, this spring, workers at the biggest companies in Japan won their biggest annual wage hike in like thirty four years, about five point one percent.

But for small and medium sized businesses, Reid says, it's a different story.

The smaller medium sized companies that really make up the bulk of the Japanese economy, this cycle doesn't appear to have kicked in just quite yet.

Why is it that smaller businesses, like the ones that are going to the class that you attended, why aren't they seeing the same kinds of benefit.

What you have to understand is that the small and medium sized businesses in Japan are very often at the mercy of their customers, which are very often larger companies, and the larger companies, for decades now, were able to dictate the terms of the business relationship. And it reminds me of an interesting phrase that you hear in Japan, which is ekosazu korrosazu, which roughly translates as don't let

And on top of this rigid power dynamic that's been entrenched for years, there's a cultural element here at play too.

There's a certain element of being seen as greedy. So rather than laying out a rational argument and using data and evidence to pressure case, there's a fear by these smaller companies that they might be seen as greedy or taking advantage of a situation where really all they're trying to do is just keep their business afloat.

But now more than ever, these small companies need to figure out how to raise their prices and fast after the break, how the Japanese government is stepping in to support small businesses, and what a failure to raise prices could mean for Japan's economy. To the outside world, Japan is enjoying a resurgence. Famous investors like Warren Buffett are talking up the market. Stocks have finally surpassed their nineteen eighty nine peak, and everyone is traveling to Japan right now.

Will go under. And then on a macroscale, essentially you will not get the kind of economic activity that the central bank and the government is looking for.

Given how important small and medium businesses are to the economy of Japan and the ruling party, what is the government doing.

Several years ago, the Japanese government actually identified this choke point, and the Japan Fair Trade Commission was actually tasked with going out and really pushing for the fair treatment of suppliers.

The government is clearly trying to help pair, but when it comes time to ask for more money, it will be the people from these smaller medium companies who actually need to do that, to say to the bigger companies, I am raising my prices.

Read.

Did the people who you met in that negotiating class in Matsue seem confident that they could do it? Did they say the class was helpful?

Yes? In the class, after it was over, I met Korgi Shidatski. He's what you might call a COO or close to a CEO at a small manufacturer in the city of mats and he is in his mid forties. And when I was talking to him, he told me he never really did have to ask for more money from his customers. So he came to the class and was really kind of relieved to learn that there were techniques that he could use to sort of build a convincing argument to raise his own prices. For example, without

How will we know if classes like this are working and if smaller companies are able to raise their prices.

The first sign that this is starting to work should start to appear in wage gains among small and mid sized businesses in Japan.

So basically we'll see these businesses starting to pay their workers more.

Yes, and then you're probably going to start to hear language from the Bank of Japan saying that they're seeing signs of healthy inflation, that inflation and price gains are being driven by legitimate or normal economic activity, as opposed to being driven by factors that are largely out of the control of policymakers, such as the higher yen, or important inflation, or higher energy prices.

Reid says it will take time to see if the government's efforts to support small businesses and classes like the one he went to in Matsue actually work. But Reed did have one last burning question for the expert negotiator, Iko Kanunji.

So that's when I sort of asked him, in fact, you know, had he raised prices during his two decades or so of doing price negotiations or even in the more recent months couple of years when his services were really in demand. And you get that sort of answer that you're surprised and not surprised to hear, which is that he himself has never raised his own prices.

Thanks for listening to The Big Take Asia podcast from Bloomberg News. I'm Rebecca Cheung Wilkins. This episode was produced by Naomi Young Young, Jessica Beck, and Adrianna Tapia, who also fact checked it. It was mixed by Blake Maples. It was edited by Caitlin Kenny, Rachel Chang, and Tom Redman. Special thanks to Yasufu Mi Sito. Our senior producers are Naomi Shavin and Kim Gettelson, and our senior editor is Elizabeth Ponson. Nicole beamsterbor is our executive producer, and Sage