Convenience-Store Squeeze Shows Deflation Dilemma Facing BoJ

The reluctance to pass on labour costs to customers is a key reason inflation remains well below its 2% target

By Lisa Du & Yuko Takeo / BLOOMBERG

Takanori Sakai works the graveyard shift four nights a week at the FamilyMart store he owns in Himeji, central Japan, because he can’t afford the higher pay employees demand these days.

“More and more stores can’t secure a profit,” the 57-year-old said. Problem is, with competition just down the street, raising prices to cover higher wages risks turning off customers who’ve become accustomed to steady prices for a generation.

Sakai and his fellow convenience-store owners are on the front lines of Japan’s battle with a “deflationary mindset”, one compounded by a declining population.

As the Bank of Japan (BoJ) repeatedly urges businesses to fatten paychecks to help stoke inflation, convenience-store chains are turning to automation and other means to absorb higher labour costs.

The reluctance to pass on those costs to customers, the BoJ said, is a key reason inflation remains well below its 2% target, despite years of extraordinary monetary stimulus.

“It’s very hard to predict when companies will stop absorbing these costs,” according to Izumi Devalier, head of Japan economics at Bank of America Merrill Lynch (BoA).

“The short answer is, when the deflation mindset changes.”

Yet with the unemployment rate at 2.4%, the labour market is getting so tight that wages and prices are beginning to budge. Workers are moving into better-paying jobs and permanent, full-time employment, BoA said in a recent report.

Meanwhile, the minimum wage that serves as something of a benchmark among retailers rose by around 11% between 2013 and 2017, part of the government’s efforts to improve paychecks overall.

And that’s where productivity comes in. If workers are more productive, companies can absorb higher wages without denting profits, salary earners spend more and the BoJ’s 2% inflation target becomes a reality.

But if the deflationary mindset never changes, the risk is those productivity increases fail to trigger broad wage gains or stronger inflation.

Japan faces rapid ageing and a decline in its working population, says Kuroda

“Japan faces rapid ageing and a decline in its working population,” BoJ governor Haruhiko Kuroda said on Tuesday, during his confirmation hearing in Parliament.

“Under this scenario, in one sense only an increase in labour productivity can improve mid- to long-term growth.”

Convenience-store franchisees in cities such as Tokyo and Osaka have already turned to foreign workers, housewives and the elderly to staff their stores, which are ubiquitous in metropolitan areas and suburbs, providing services such as package drop-off and bill payment, and selling everything from underwear to fresh foods.

Now, big chains FamilyMart UNY Holdings Co Ltd, Seven & i Holdings Co Ltd and Lawson Inc are investing in automation and other labour-saving measures to help their franchisees keep stores running and offset rising wages.

Five major operators are working with the economy ministry to place electronic tags on all 100 billion products in their stores by 2025.

The tags, called radio frequency identification (RFID) devices, enable automated price tabulation and inventory processes.

In February, a FamilyMart store in the ministry’s basement introduced the RFID tags and an unmanned cash register for a limited test run. Ministry officials browsed rows of drinks, rice balls and sandwiches — all plastered with small stickers holding the tags.

In February, a FamilyMart store introduced the RFID tags and an unmanned cash register for a limited test run

“With demographic decline becoming a major problem, this is something we have to address with speed,” said Yotetsu Hayashi, a senior ministry official overseeing the initiative, which is meant to improve the nation’s logistics system and productivity.

Lawson, which opened an innovation centre in Tokyo in October, is working with Panasonic Corp on a range of initiatives, including automated payment and bagging of goods.

The company also began supplying tablets and new, more efficient cash registers to its stores in the fiscal year that ended in February. Seven & i invested an estimated ¥27 billion (RM1.08 billion) in the just-ended fiscal year to reorganise franchisees’ stores for greater efficiency, and another ¥15 billion to install dishwashers in those that sell prepared food.

Last year, it lowered the cut of profits it collects from franchisees by one percent to help offset the labour costs.

FamilyMart last month finished installing a new point-of-sale system to simplify cash register operations, at a cost of around ¥11 billion.

Over the longer term, it said, it will focus on comprehensive operational reforms and utilise advanced technology, including artificial intelligence, with the goal of cutting workloads by half.

The short-term benefit for store owners is likely to be limited, analysts said. “The problem with

However, the short-term benefit for store owners is likely to be limited, analysts say

technology is that if you install something that doesn’t demand labour like a cash register, you still have to teach the customer how to use it,” Jefferies LLC analyst Michael Allen said. “It takes years for the impact to be seen.”

For Japan’s economy, though, such investment could help solve its demographic riddle and deflationary drag over the longer term.

While rapid automation could cost millions of jobs, Japan’s shrinking population means it won’t suffer as much as a growing country, while investment in greater productivity could help fuel higher pay and economic expansion.

Signs already point to Japan’s deflationary mindset slowly changing, and to a positive cycle of increasing productivity, wage growth and inflation, according to Bloomberg Economics’ Yuki Masujima.

In the long term, productivity growth in the service sector will remain vital, as the sector’s share of Japan’s economy grows, he said.

“It’s important, and when productivity is being improved, we need to properly train employees, and make sure they’re able to switch to different industries or move to different departments within their company,” Masujima said.

Meanwhile, franchisee Sakai has formed an association of store owners that’s lobbying lawmakers for a franchise law that, among other things, would allow them to pay a lower share of profits to their corporate partners.

Until then, he said, he has gotten used to working nights.

“I haven’t had a real day off from the store in 13 years — not one day,” he said. “That’s something I can say for sure.”