Japanese Businesses Are Taking Price-Raising Lessons to Survive

In the 23 years that Koji Shiratsuki has worked for Hinoden Electric Industries Ltd., the company hardly ever asked customers to pay more. Now it needs to — and nobody there knows how it’s done.

So the 44-year-old at the control-panel maker in western Japan took an unusual step. He joined a class on negotiating higher prices, a given in most of the rest of the world but a forgotten skill in the Asian country, where decades of deflation had kept prices and salaries frozen in time.

Shiratsuki’s entire career has coincided with a protracted period of stagnation in Japan, the so-called lost decades after an asset bubble burst in the early 1990s. After years of unconventional monetary policy, greater economic activity, as well as a dose of imported inflation, are jolting prices higher. Hinoden now faces rising costs for raw materials and components. If it doesn’t succeed in charging more, its business could be squeezed into oblivion.

“Unless something changes, there will be no company,” Shiratsuki said in an interview, adding he didn’t know whether the collapse would take years or decades, but it would come.

Big Take Asia

The Lost Art of Raising Prices in Japan

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To the outside world, Japan is enjoying a resurgence. Inflation is back. Famous investors like Warren Buffett are talking up the market. Stocks have finally surpassed their 1989 peak.

But beyond the giant corporations of Tokyo and other major cities, smaller companies where most people work still find it hard to raise prices. They face pressure from customers — often bigger firms — to keep them low. Asking for more money can be frowned upon as greedy in Japan. After years of not having to pay more, people are resistant to change.

But with the Bank of Japan widely expected to raise interest rates, potentially as soon as its two-day policy meeting that starts Tuesday, change is coming. Whether businesses like Hinoden can follow suit and raise prices will ultimately determine whether the $4.2 trillion economy’s much-touted revival is real.

On a sunny day in April, Shiratsuki and a few dozen others assembled in a classroom in Matsue, a city of about 200,000 in a remote western stretch of Honshu, the country’s main island. A foundation promoting local businesses had booked a room in a building atop a verdant hill, just a few minutes’ drive from the city center.

The students — managers and salespeople from smaller companies in the region — had come to hear Ikkou Kanonji, a veteran negotiator, speak.

“The tide is finally turning after 30 years,” said Kanonji, a bespectacled tall man in gray slacks and a double-breasted navy jacket. “Now is your chance” to raise prices, he said.

The goal of any negotiation is to find the best outcome for both parties, Kanonji explained, speaking softly and precisely. Know your style. Understand whether you’re coolly analytical or engagingly friendly, he said, using feudal warlords from Japanese history as examples. Set clear goals. Prepare alternatives for when things don’t go as planned. “This is not a fight,” he said.

In his presentation, titled “Price Transfer Know-How,” Kanonji tells the inexpert negotiators to do their homework beforehand: 80% of negotiations are determined by the level of preparation, he said. Understand what you can barter and trade off, from payment terms and exclusivity to delivery dates and post-sale services, he adds.

Kanonji left a career negotiating real estate contracts in the apparel business two decades ago to become a full-time instructor. He’s never been as busy as this past year, crisscrossing the archipelago to deliver his message. He’s spoken to truckers in Hokkaido, industrial suppliers in Hiroshima and parts makers in Ibaraki.

The attendees in Matsue have things in common. For one, they all wear sagyogi, the drab workers’ uniforms of Japan’s manufacturing industry, a marker of identity even for people who never go near the factory floor. And to one degree or another, they all see their existence as under threat.

These are the companies caught in the middle, struggling to pass on rising costs. Exporters such as Toyota Motor Corp. benefit from a weaker yen, which boosts the value of overseas profits when brought home. Uniqlo, 7-Eleven and other recognized brands enjoy a certain amount of pricing power with consumers. But the vast network of smaller businesses generally have no such advantages.

“I worry a lot,” said Shiratsuki, referring to the prospect of having to lay off staff if Hinoden can’t raise prices.

In a country with little state welfare, companies provide the social security net. People accept lower-paying jobs but in turn they expect to keep them. It’s more group-oriented and less money-focused than hyper-competitive US firms where poor performers are routinely cut.

“We’ve never had to let people go,” Shiratsuki said. “And we don’t ever want to.”

In March, the central bank raised borrowing costs for the first time since 2007, ending 14 years of negative interest rates. Governor Kazuo Ueda judged that the virtuous cycle of rising prices and higher wages was “within view.”

But the BOJ remains cautious, partly because the cycle has mainly taken hold at larger companies. This spring, workers at the biggest enterprises won their best annual wage hike in 33 years, of 5.1%. At smaller firms that make up 90% of the economy, the figure was much lower. While consumer inflation stood at 2.8% in June, price gains for food and utilities were higher, taking a bigger chunk out of household spending.

In the class, Kanonji explained the reasons why smaller companies find it hard. There’s an old Japanese saying, ikasazu, korosazu, which roughly translates as “don’t let them live, but don’t let them die.” Originally coined by feudal lords to describe how peasant farmers should be treated, the mantra became something closer to industrial policy in the modern era. Suppliers have long been expected to serve the giant enterprises that drive the economy and represent the country on the global stage.

And larger companies know all too well that they hold the power. If they withdraw their orders, smaller firms might collapse. “Fear is the defining factor for business owners when they’re negotiating,” Kanonji said.

An unhealthy dependency emerges: the smaller firms get to keep their contracts, but they must work on meager terms. When companies can’t charge more, they can’t pass those gains on to employees, notes Donald Low, a professor of public policy at the Hong Kong University of Science and Technology.

And without a constant flow of higher paychecks feeding into higher prices, the economy sputters, unable to kickstart the classic wage-price cycle, according to Low. Only when higher incomes feed into higher prices will the central bank see the kind of healthy price gains it’s looking for. “We need to see more demand-side inflation,” Low said.

At the class, there was one clear sign that the government understands the predicament. A representative of the Japan Fair Trade Commission, which regulates competition in areas such as antitrust and subcontracting, showed up. He had a message for attendees: Any behavior by big business that makes it impossible to negotiate prices is illegal and should be reported.

The agency took up the cause of smaller businesses almost a decade ago, but spurred on by Prime Minister Fumio Kishida’s administration, efforts went into high gear a few years ago. In late 2022, it released the names of 13 companies that it considered to be abusing their dominant bargaining positions. It included some of Japan’s biggest enterprises, such as the delivery company Sagawa Express Co., discount retailer Don Quijote and two Toyota group manufacturers. Three months later, the agency added a further 10 businesses. Naming and shaming is often an effective tactic in Japan.

Then earlier this year, it publicly reprimanded Nissan Motor Co. for unilaterally cutting ¥3 billion ($19.5 million) in payments to suppliers. The carmaker had been struggling to sell more cars and restore profitability since the 2018 arrest and expulsion of former Chairman Carlos Ghosn.

Nissan repaid the money, with Chief Executive Officer Makoto Uchida apologizing and returning 30% of his salary. “We have not been doing enough to listen to their challenges,” he said of suppliers on May 31.

Kishida’s ruling Liberal Democratic Party relies on the votes of people outside the major metropolises, and smaller firms not being able to raise wages, laying off staff or going bankrupt translates into political trouble.

Roughly 565,000 companies struggle to pay debts from profits alone, according to Tokyo Shoko Research. Just a tiny rise in interest rates, a 10th of a percentage point, would boost that number by about 12% to 632,000.

In the class, Shiratsuki sat near the front and took notes. His hairstyle makes him look much younger. He runs the daily operations of Hinoden’s two small factories, a 20-minute drive from Matsue, beside a brackish lake known for producing the tiny shijimi clams that pair well with miso soup. Hinoden’s president spends most of his time at the manufacturer’s parent company in Hiroshima, 2 ½ hours away.

Hinoden has never missed a delivery deadline in its 50 years in business. Its crew of 30 workers hand-makes things like control units for factory machines and pumps used by water utilities.

The price of copper used in its products has roughly doubled over the past four years. For a business with ¥440 million in annual sales, the cost of every washer, circuit relay and steel sheet counts. About half of Hinoden’s expenses are made up of components and utility bills, while the rest is labor.

After the class, Shiratsuki says he has learned some techniques for negotiating higher prices, has more convincing arguments and is trying to put them to work. For example, by citing publicly available prices for raw materials and energy, he can show customers how they impact his bottom line.

Some positive signs are emerging that he and others are succeeding. More smaller businesses say that they are able to pass on higher costs to customers, according to the latest report by the Small and Medium Enterprise Agency in June.

Still, few would dispute that challenges remain. Kanonji, the instructor, is a case in point. Now in his 70s, he’s looking to retire from his classes, which are as much motivational speeches as practical negotiation techniques.

“You have to make your voices heard,” he told the group. “Ask for what you need to ask for.”

But even though his lessons have never been more in demand, he hasn’t raised his own prices. They still cost the same as they did 20 years ago.