WEBVTT - Japan’s Small Businesses Have a Problem. They Don’t Know How to Raise Prices 0:00:03.120 --> 0:00:09.080 Bloomberg Audio Studios, podcasts, radio news. 0:00:11.039 --> 0:00:15.360 On a sunny day in April in Matsue, a small 0:00:15.440 --> 0:00:18.759 city on the western coast of Japan, a speaker stands 0:00:18.760 --> 0:00:22.480 at the front of a classroom, hands on the podium, 0:00:22.800 --> 0:00:26.640 encouraging the people in the room to stand up for themselves. 0:00:27.360 --> 0:00:30.120 I scol you so at the core of Google last week. 0:00:30.280 --> 0:00:34.479 You have to make your voices hard. You know what 0:00:34.560 --> 0:00:38.400 I'm talking about, right. I want you to raise your 0:00:38.440 --> 0:00:40.560 boys more and more. 0:00:41.520 --> 0:00:44.840 The roughly twenty or so people in the classroom pay 0:00:44.960 --> 0:00:49.720 close attention, taking notes diligently from their seats, whilest some 0:00:49.920 --> 0:00:55.080 nod their heads as echo. Kanonji, a veteran negotiator, continues on. 0:00:57.040 --> 0:00:59.800 The goal of any negotiation is to find the best 0:01:00.040 --> 0:01:05.920 outcome for both parties. Know your style, Understand whether you're 0:01:06.000 --> 0:01:09.560 coolly anriged goal or engaging Greek friendly. 0:01:11.080 --> 0:01:14.360 It sounds like the kind of negotiating seminar or business 0:01:14.360 --> 0:01:16.640 class you might expect to find at a high school 0:01:16.720 --> 0:01:21.280 or college. But the people here today are not students. 0:01:22.240 --> 0:01:25.080 Many of them are managers and salespeople in their mid 0:01:25.120 --> 0:01:28.640 thirties and upwards. They work for small and medium sized 0:01:28.680 --> 0:01:33.280 businesses in Japan, and they've come here because they desperately 0:01:33.400 --> 0:01:36.039 need to learn a skill they haven't needed to use 0:01:36.080 --> 0:01:40.280 in ages, how to raise prices. 0:01:41.720 --> 0:01:47.440 The tide is finally turning after thirty years, the power 0:01:47.520 --> 0:01:51.240 brands is changing. Now is your chance? 0:01:53.120 --> 0:01:56.360 So why are people who have already been in business 0:01:56.400 --> 0:02:00.120 for years taking a class on how to raise prices? 0:02:00.200 --> 0:02:00.560 Now? 0:02:01.400 --> 0:02:06.120 Well, after decades of prices pretty much standing still falling 0:02:06.160 --> 0:02:12.639 in Japan, things are starting to change. Costs are rising 0:02:12.720 --> 0:02:16.399 in Japan, and that's put smaller and medium sized companies 0:02:16.400 --> 0:02:18.480 in the country in a tricky spot. 0:02:18.960 --> 0:02:22.400 So the smaller companies in Japan are getting squeezed because 0:02:22.560 --> 0:02:25.400 what's happening for them is that they're paying more for electricity, 0:02:26.000 --> 0:02:29.440 they're paying more for raw materials, parts and components. 0:02:29.880 --> 0:02:33.720 Reed Stevenson is a senior editor at Bloomberg News based 0:02:33.760 --> 0:02:34.280 in Tokyo. 0:02:34.639 --> 0:02:36.960 And then their employees are coming to them and saying, look, 0:02:37.000 --> 0:02:39.440 we have to spend more just to put food on 0:02:39.480 --> 0:02:41.560 the table every month. You know, can you raise our 0:02:41.600 --> 0:02:43.680 wages to survive? 0:02:44.240 --> 0:02:48.200 These businesses will need to raise their prices, and whether 0:02:48.320 --> 0:02:52.120 or not they are successful has huge implications for Japan's 0:02:52.160 --> 0:02:56.720 economy overall because smaller medium sized businesses like these are 0:02:56.800 --> 0:02:59.800 a critical part of the Japanese economy. 0:03:00.680 --> 0:03:03.200 They actually make up ninety percent of the companies in 0:03:03.280 --> 0:03:06.600 Japan and employ the vast majority of people. 0:03:07.520 --> 0:03:11.200 And Japan's central Bank is really paying attention to what 0:03:11.320 --> 0:03:16.720 happens at these companies because after years of unconventional monetary policy, 0:03:17.280 --> 0:03:20.840 the Bank of Japan believes the economy may finally be 0:03:20.919 --> 0:03:25.120 moving away from decades of deflation and towards some healthy 0:03:25.320 --> 0:03:30.480 price increases. They've already raised borrowing costs earlier this year, 0:03:30.880 --> 0:03:34.080 and this week they'll decide on whether they will raise 0:03:34.160 --> 0:03:42.080 rates again. Welcome to The Big Take Asia from Bloomberg News. 0:03:42.520 --> 0:03:46.760 I'm Rebecca Chung Wilkins. Every week we take you inside 0:03:46.760 --> 0:03:50.120 some of the world's biggest and most powerful economies and 0:03:50.160 --> 0:03:54.600 the markets, tycoons and businesses that drive this ever shifting region. 0:03:55.560 --> 0:03:59.200 Today on the show, can small and medium sized businesses 0:03:59.200 --> 0:04:03.400 in Japan learned to raise their prices? And what could 0:04:03.480 --> 0:04:13.320 happen to Japan's economy if they don't. To help us 0:04:13.400 --> 0:04:17.080 understand how Japan got to this place where people literally 0:04:17.160 --> 0:04:19.840 need to take a class to learn how to raise prices, 0:04:20.360 --> 0:04:22.760 I asked reed to take us back to what's known 0:04:22.800 --> 0:04:27.440 as Japan's Lost decades, which started in the nineties after 0:04:27.520 --> 0:04:30.000 a massive asset bubble burst. 0:04:30.480 --> 0:04:35.640 Once that bubble burst, essentially the Japanese government engineered what 0:04:35.720 --> 0:04:41.760 you can call an ultrasoft landing. So it took really 0:04:41.800 --> 0:04:45.040 more than a decade for all of that to be resolved, 0:04:45.160 --> 0:04:47.800 for bad loans to be written off, and by the 0:04:47.880 --> 0:04:51.120 end of that decade or at least a decade plus, 0:04:51.520 --> 0:04:56.560 Japan found itself in a deflationary environment, and so prices 0:04:56.600 --> 0:05:01.640 were going down, and the central bank essentially stepped in 0:05:01.839 --> 0:05:05.000 and cut rates to zero and then to blow zero 0:05:05.600 --> 0:05:09.120 to try and prop up the economy. But for some reason, 0:05:09.720 --> 0:05:13.159 when you get into a deflationary cycle, it kind of 0:05:13.160 --> 0:05:18.080 builds on itself. People spendless and it keeps going and going, 0:05:18.839 --> 0:05:21.680 and people got used to not paying more, and so 0:05:22.080 --> 0:05:24.320 if you think about it, people in their sort of 0:05:24.360 --> 0:05:29.040 late thirties, forties and even fifties in Japan had never 0:05:29.080 --> 0:05:32.520 really had to step into a situation where they had 0:05:32.560 --> 0:05:36.600 to negotiate and push for the person on the other 0:05:36.640 --> 0:05:38.640 side of the table to pay more. 0:05:41.120 --> 0:05:44.279 But with rising raw material prices after the pandemic, a 0:05:44.480 --> 0:05:49.720 steadily weakening yen and a mild economic recovery, prices are 0:05:49.800 --> 0:05:51.240 pitching up again in Japan. 0:05:51.800 --> 0:05:55.080 If you're a consumer, you're seeing this happen at the 0:05:55.120 --> 0:05:58.919 grocery store. So you're paying anywhere from maybe fifteen to 0:05:58.960 --> 0:06:02.320 twenty percent more for a carton of milk. You're paying 0:06:02.320 --> 0:06:06.360 more for vegetables, and consumers are feeling the pinch. 0:06:06.920 --> 0:06:09.720 All of this has prompted the Bank of Japan or 0:06:09.760 --> 0:06:14.200 the BOJ, to finally switch gears and move away from 0:06:14.279 --> 0:06:18.800 this notion of keeping interest rates below zero. In March, 0:06:19.279 --> 0:06:24.040 for the first time in seventeen years, the BOJ raised 0:06:24.120 --> 0:06:28.880 borrowing costs to zero, well between zero and zero point 0:06:28.920 --> 0:06:33.279 one percent, and read says, what the BOJ is hoping 0:06:33.360 --> 0:06:34.040 to see. 0:06:33.800 --> 0:06:38.560 Here is this sort of healthy cycle where higher wages 0:06:38.640 --> 0:06:43.400 feed into more spending, into a sort of robust but 0:06:43.520 --> 0:06:45.320 manageable level of inflation. 0:06:46.240 --> 0:06:49.200 The idea is that if people make more money, they 0:06:49.200 --> 0:06:52.760 can afford to spend more, and so prices can go up. 0:06:52.960 --> 0:06:56.719 So that you really get the economy essentially working like 0:06:56.800 --> 0:06:58.960 it used to many decades ago. 0:06:59.279 --> 0:07:02.520 So I guess the big question is is the boj's 0:07:02.600 --> 0:07:07.159 plan of raising borrowing costs actually working so far? 0:07:07.800 --> 0:07:12.360 This policy is working for the larger companies, especially if 0:07:12.440 --> 0:07:17.400 the export, because obviously they can command higher prices abroad 0:07:17.560 --> 0:07:22.200 where there are in fact, quite significantly inflationary environments. 0:07:22.680 --> 0:07:26.920 Essentially, what Read is saying here is that big brands 0:07:27.000 --> 0:07:31.280 like Toyota or Uniclo or seventy eleven have an advantage 0:07:31.480 --> 0:07:34.720 because they can sell outside of Japan in places where 0:07:34.840 --> 0:07:38.200 prices are just generally higher right now because of inflation, 0:07:38.960 --> 0:07:41.400 So they can charge more for their products in those 0:07:41.440 --> 0:07:45.880 places and raise prices, and with higher prices, bigger companies 0:07:45.920 --> 0:07:48.040 have been able to pay their employees more. 0:07:48.320 --> 0:07:52.600 For example, this spring, workers at the biggest companies in 0:07:52.680 --> 0:07:56.680 Japan won their biggest annual wage hike in like thirty 0:07:56.680 --> 0:07:59.160 four years, about five point one. 0:07:59.000 --> 0:08:03.840 Percent small and medium sized businesses, Reed says, it's a 0:08:03.920 --> 0:08:05.560 different story. 0:08:05.480 --> 0:08:09.280 The smaller medium sized companies that really make up the 0:08:09.320 --> 0:08:13.840 bulk of the Japanese economy. This cycle doesn't appear to 0:08:13.880 --> 0:08:16.040 have kicked in just quite yet. 0:08:16.560 --> 0:08:19.360 Why is it that smaller businesses, like the ones that 0:08:19.480 --> 0:08:21.920 are going to the class that you attended, why aren't 0:08:21.920 --> 0:08:23.520 they seeing the same kinds of benefit. 0:08:23.920 --> 0:08:26.240 What you have to understand is that the small and 0:08:26.320 --> 0:08:29.160 medium sized businesses in Japan are very often at the 0:08:29.240 --> 0:08:33.520 mercy of their customers, which are very often larger companies, 0:08:34.240 --> 0:08:37.640 and the larger companies, for decades now, were able to 0:08:37.679 --> 0:08:42.120 dictate the terms of the business relationship. And it reminds 0:08:42.160 --> 0:08:45.000 me of an interesting phrase that you hear in Japan, 0:08:45.520 --> 0:08:52.000 which is ikosazu korosazu, which roughly translates as don't let 0:08:52.000 --> 0:08:54.920 them live, but don't let them die. And this was 0:08:55.000 --> 0:08:58.520 actually a term that was used by feudal lords hundreds 0:08:58.559 --> 0:09:02.000 of years ago about how peasant farmers should be treated, 0:09:02.440 --> 0:09:05.320 but it actually came up over the modern era, the 0:09:05.360 --> 0:09:08.959 post war economic era, as a way to treat suppliers, 0:09:09.160 --> 0:09:13.160 to treat the smaller companies that serve the larger companies 0:09:13.520 --> 0:09:19.360 basically keep them alive enough to provide parts and goods 0:09:19.400 --> 0:09:22.760 and services, but never let them die. 0:09:23.400 --> 0:09:26.640 And on top of this rigid power dynamic that's been 0:09:26.960 --> 0:09:31.439 entrenched for years, there's a cultural element here at play too. 0:09:31.640 --> 0:09:35.559 There's a certain element of being seen as greedy. So 0:09:35.960 --> 0:09:40.400 rather than laying out a rational argument and using data 0:09:40.440 --> 0:09:45.160 and evidence to pressure case, there's a fear by these 0:09:45.160 --> 0:09:48.000 smaller companies that they might be seen as greedy or 0:09:48.040 --> 0:09:51.280 taking advantage of a situation where really all they're trying 0:09:51.320 --> 0:09:53.199 to do is just keep their business afloat. 0:09:53.400 --> 0:09:56.760 But now more than ever, these small companies need to 0:09:56.800 --> 0:10:03.480 figure out how to raise their prices fast after the break, 0:10:03.800 --> 0:10:07.920 how the Japanese government is stepping in to support small businesses, 0:10:08.400 --> 0:10:11.520 and what a failure to raise prices could mean for 0:10:11.600 --> 0:10:29.200 Japan's economy. To the outside world, Japan is enjoying a resurgence. 0:10:29.920 --> 0:10:33.720 Famous investors like Warren Buffett are talking up the market. 0:10:34.480 --> 0:10:38.080 Stocks have finally surpassed their nineteen eighty nine peak, and 0:10:38.200 --> 0:10:41.920 everyone is traveling to Japan right now. But it's another 0:10:42.000 --> 0:10:47.400 picture for smaller corporations. Many are facing higher prices for 0:10:47.480 --> 0:10:52.160 raw materials and components, and their workers want wage increases 0:10:53.280 --> 0:10:56.800 to cover these things. These companies will need to figure 0:10:56.800 --> 0:11:01.880 out how to raise prices, and Bloomberg to Reed, Stevenson says, 0:11:01.920 --> 0:11:07.400 there's real stakes here. If they can't read what happens 0:11:07.440 --> 0:11:10.000 to these businesses. If they can't figure it out and 0:11:10.120 --> 0:11:12.720 don't raise their prices, well they will go. 0:11:12.720 --> 0:11:17.120 Under and then on a macro scale, essentially you will 0:11:17.160 --> 0:11:20.640 not get the kind of economic activity that the central 0:11:20.640 --> 0:11:22.679 bank and the government is looking for. 0:11:23.960 --> 0:11:26.960 Given how important small and medium businesses are to the 0:11:27.000 --> 0:11:30.840 economy of Japan and the ruling party, what is the 0:11:30.880 --> 0:11:31.640 government doing. 0:11:32.400 --> 0:11:37.199 Several years ago, the Japanese government actually identified this choke point, 0:11:37.400 --> 0:11:42.960 and the Japan Fair Trade Commission was actually tasked with 0:11:43.800 --> 0:11:50.239 going out and really pushing for the fair treatment of suppliers. 0:11:50.679 --> 0:11:55.480 And so what the Japan FTC did was employed this 0:11:55.600 --> 0:12:00.920 sort of interesting tactic of naming large companies that were 0:12:01.040 --> 0:12:05.240 abusing their dominant bargaining position. And so in fact, the 0:12:05.320 --> 0:12:11.120 Japan FTC actually took the step of publicly reprimanding Nissan 0:12:11.400 --> 0:12:15.960 Motor Company for cutting a significant amount of money in 0:12:16.000 --> 0:12:21.240 payments to suppliers, and so Nissan paid in full some 0:12:21.320 --> 0:12:24.520 of these payments, and then the president and chief executive 0:12:24.559 --> 0:12:27.480 officer ended up apologizing and taking a thirty percent pay cup. 0:12:28.040 --> 0:12:31.439 The government is clearly trying to help pair, but when 0:12:31.520 --> 0:12:33.959 it comes time to ask for more money, it will 0:12:34.000 --> 0:12:37.400 be the people from these smaller medium companies who actually 0:12:37.440 --> 0:12:40.199 need to do that to say to the bigger companies, 0:12:40.800 --> 0:12:46.760 I am raising my prices. Read. Did the people who 0:12:46.880 --> 0:12:50.559 you met in that negotiating class in Matsue seem confident 0:12:50.640 --> 0:12:53.160 that they could do it? Did they say the class 0:12:53.200 --> 0:12:53.679 was helpful. 0:12:54.080 --> 0:12:57.120 Yes. In the class after it was over, I met 0:12:57.200 --> 0:13:01.640 Korgi Shidatski. He's what you might call a COO or 0:13:01.720 --> 0:13:04.800 close to a CEO at a small manufacturer in the 0:13:04.840 --> 0:13:07.840 city of mats And he is in his mid forties, 0:13:08.040 --> 0:13:10.680 and when I was talking to him, he told me 0:13:11.040 --> 0:13:14.880 he never really did have to ask for more money 0:13:14.880 --> 0:13:19.160 from his customers. So he came to the class and 0:13:20.400 --> 0:13:24.079 was really kind of relieved to learn that there were 0:13:24.440 --> 0:13:27.760 techniques that he could use to sort of build a 0:13:27.840 --> 0:13:32.959 convincing argument to raise his own prices. For example, without 0:13:33.000 --> 0:13:36.280 having to reveal your own cost structure, you can point 0:13:36.360 --> 0:13:40.520 to publicly available information such as you know, the rising 0:13:41.280 --> 0:13:47.079 market price for copper, or rising costs for electricity and 0:13:47.520 --> 0:13:49.320 gas and et cetera. 0:13:50.320 --> 0:13:54.840 How will we know if classes like this are working 0:13:55.080 --> 0:13:58.240 and if smaller companies are able to raise their prices. 0:13:58.840 --> 0:14:02.400 The first sign that this is starting to work should 0:14:02.480 --> 0:14:07.480 start to appear in wage gains among small and mid 0:14:07.520 --> 0:14:08.800 sized businesses in Japan. 0:14:09.640 --> 0:14:13.120 So basically we'll see these businesses starting to pay their 0:14:13.160 --> 0:14:13.840 workers more. 0:14:14.520 --> 0:14:17.679 Yes, and then you're probably going to start to hear 0:14:17.880 --> 0:14:22.080 language from the Bank of Japan saying that they're seeing 0:14:22.240 --> 0:14:27.280 signs of healthy inflation, that inflation and price gains are 0:14:27.320 --> 0:14:32.880 being driven by legitimate or normal economic activity, as opposed 0:14:32.880 --> 0:14:35.920 to being driven by factors that are largely out of 0:14:35.960 --> 0:14:39.960 the control of policymakers, such as the higher yen, or 0:14:40.000 --> 0:14:42.480 important inflation, or higher energy prices. 0:14:43.200 --> 0:14:46.000 Reed says it will take time to see if the 0:14:46.040 --> 0:14:50.200 government's efforts to support small businesses and classes like the 0:14:50.240 --> 0:14:54.920 one he went to in Matsue actually work. But Reed 0:14:54.960 --> 0:14:59.920 did have one last burning question for the expert, Neugosti 0:15:00.800 --> 0:15:01.600 Ko Kanunji. 0:15:02.440 --> 0:15:04.760 So that's when I sort of asked him in fact, 0:15:04.840 --> 0:15:08.960 you know, had he raised prices during his two decades 0:15:09.040 --> 0:15:13.000 or so of doing price negotiations or even in the 0:15:13.080 --> 0:15:17.600 more recent months and couple of years when his services 0:15:17.600 --> 0:15:20.640 were really in demand. And you get that sort of 0:15:20.680 --> 0:15:24.680 answer that you're surprised and not surprised to hear, which 0:15:24.720 --> 0:15:27.840 is that he himself has never raised his own prices. 0:15:33.120 --> 0:15:35.680 Thanks for listening to The Big Take Asia podcast from 0:15:35.680 --> 0:15:40.320 Bloomberg News. I'm Rebecca Cheung Wilkins. This episode was produced 0:15:40.320 --> 0:15:44.200 by Naomi Young Young, Jessica Beck, and Adrianna Tapia, who 0:15:44.200 --> 0:15:47.880 also fact checked it. It was mixed by Blake Maples. 0:15:48.080 --> 0:15:51.400 It was edited by Caitlin Kenny, Rachel Chang, and Tom Redman. 0:15:52.080 --> 0:15:56.280 Special thanks to Yasufumi Saito. Our senior producers are Naomi 0:15:56.280 --> 0:15:59.520 Shaven and Kim Gettelson, and our senior editor is Elizabeth Ponson. 0:16:00.400 --> 0:16:03.400 Nicole Beamster bor is our executive producer, and Sage Bauman 0:16:03.480 --> 0:16:06.680 is Bloomberg's head of podcasts. Please follow and review The 0:16:06.720 --> 0:16:10.080 Big Take Asia wherever you listen to podcasts. It helps 0:16:10.160 --> 0:16:13.440 new listeners find the show. See you next time,