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Time to Raise Incomes and Prices? Tomikazu Hiraga, Ph.D. Professor, Faculty of Management, Osaka Seikei University Professor, Faculty of Management, Osaka Seikei University Adjunct Research Fellow, NLI Research Institute [Date of Issue: 28/September/2018 No.0283-1086]

Date of Issue: 28/September/2018

Time to Raise Incomes and Prices?

Tomikazu Hiraga, Ph.D.
Professor, Faculty of Management, Osaka Seikei University
Adjunct Research Fellow, NLI Research Institute


As Japan's population ages and the birth rate declines, creating a virtuous circle that sees goods and services provided at a price commensurate with their actual value and boosts both corporate profitability and consumer income will be vital in realizing a higher standard of living.


Visitors to Japan from emerging Asian countries have recently been commenting on the cheap prices of Japanese goods and services. For example, visitors from the Asian Newly Industrialized Economies (NIES: Korea, Taiwan, Singapore and Hong Kong) and advanced ASEAN member countries such as Malaysia and Thailand don't seem at all surprised to pay 1,000 yen for a bowl of ramen.

My vague impression was that this was mostly due to the exchange rate and distribution costs, but thinking more deeply about the situation, there are also clearly other factors in play—in particular, the higher economic levels and incomes brought about by economic development in Asia except Japan, and the low prices of Japanese goods and services compared to other countries. While it's nice to please visitors to Japan with cheap prices, this situation also reflects a relative decline in the profitability of Japanese companies and the personal income of the Japanese people who represent the main consumers of Japanese goods and services.

Measuring economic scale in Japan and other major economic powers by trends in nominal gross domestic product (GDP) and per capita GDP over 20 years, Japan maintained second position after the United States for many years until it was replaced by China in 2010. Since that time, the gap between Japan and the two leading countries has continued to expand, with Japan alone failing to increase its economic scale in the last 20 years (Fig. 1).

Fig. 1: Trends in GDP in main Western countries, Japan and China (US$ million)
In terms of per capita GDP too (Figs 2.1 and 2.2), where Japan was formerly led or neck and neck with the main Western powers, now even in Asia we trail behind Singapore and Hong Kong, especially on a purchasing power parity (PPP) basis, we are losing out to not only these two Asian neighbors but also Taiwan, with Korea right on our heels. Amidst these changes, wage levels in Asia are also continuing to rise, with general manager and executive wages reported to be already higher than in Japan and middle maneger' wages also catching up (Nikkei Shimbun, 27 August 2017).

Fig. 2.1 Trends in per capita GDP in main Western countries and Japan (US$)
Fig. 2.2 Trends in per capital GDP in main Asian economies and Japan (US$)
Under these conditions, prices have not risen in Japan—in fact, Japan has experienced deflation in over half of the last 20 years—and corporate profitability and personal income too have in most cases failed to rise. From another angle, it could be said that because corporate profitability and personal income have not increased, nor have prices.

These days, the price of goods and services is basically determined by market competition. In the Japan, however, a relatively large market scale and broad reach, as well as intense competition among Japan-based companies (especially those which are domestic demand-driven) for whom Japanese market position is particularly important and significant, have led to numerous rival firms coexisting in a state of low profitability in many market segments. Only segment leaders are managing to reap strong profits.

As a result, a low price structure has developed in Japan which is quite different from the general market principles and markets pertaining elsewhere in the world. The extremely low prices of only a few year old model of television charged by famous manufacturers with great technological prowess, as well as gyudon (a rice bowl topped with beef) and hamburgers being sold for almost the same price as 20 years ago, are just a few examples of Galapagos-like market evolution in Japan. This is why so many visitors to Japan find that they can buy great products for low prices.

To return to the example of ramen, given that a famous brand of Kyushu ramen, which is now very popular in Asia, goes for around 1,200 yen in Hong Kong (HKD$89) and around 1,050 yen in Taiwan (TWD$288) for the most basic bowl, it's no wonder that tourists are happy to pay 1,000 yen in Japan. In fact, the actual price in Japan is 890 yen, which doubtless gives tourists the impression that it is even cheaper.

Entering highly lucrative offshore markets is a valuable option for companies looking to boost their profitability, but at the same time, it will also be important to raise prices in Japan, and not just by boosting the number of visitors to Japan to take advantage of their significant purchasing power. First, we hope stronger companies to drive a shift to higher wages so as to increase the purchasing power of Japanese consumers, while also raising the price of goods and services to a level actually commensurate with their value.

The other important aspect will be to convince Japanese consumers that excessively low prices aren't actually to their advantage but are rather part of a negative spiral of low income leading to low corporate profits leading to low prices and stagnation, and that consequently they need to be prepared to pay prices that reflect actual value. The idea that service means free of charge—which is surely unique interpretation or sense in Japan—will also need to be changed, and I suggest that if we want to realize a more mature consumer society, consumer education in schools would be a good place to start.

As Japan's population ages and the birth rate declines, creating a virtuous circle that sees goods and services provided at a price commensurate with their actual value so that companies can garner the profits they deserve and consumers can enjoy higher incomes and more purchasing power will be vital in realizing a higher standard of living.


About the Author
Tomikazu Hiraga
Professor, Faculty of Management, Osaka Seikei University
Adjunct Research Fellow, NLI Research Institute

Graduated from the Faculty of Economics at The University of Tokyo and joined Tokio Marine and Fire Insurance (now Tokio Marine & Nichido Fire Insurance). Also worked at the Ministry of Foreign Affairs (ODA to the Asian countries), the Japan Center for International Finance (Director of Europe Dept. and Director of Asia and Oceania Dept.) and the Japan Credit Rating Agency, Ltd. (General Manager and Chief Analyst of International Dept.) before joining the NLI Research Institute in 2009. Became Executive Research Fellow & General Manager for Asia in 2014, and took up his current position in April 2018. Also lectures at Sophia University. His academic qualifications include a Ph.D.in Business Administration, an LL.M. and a Harvard Business School General Manager Program Certificate.


(For the Japanese version of this article)


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