Chocolate inflation bittersweet for Japan

Robin Harding and Leo Lewis
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Times are hard for Japanese with a sweet tooth as the country bemoans the latest side effect of Abenomics: a surge in the price of chocolate.

Over the past two weeks, all three of Japan's largest confectioners — Meiji, and Lotte — have announced sharp increases in the price of any sweet that uses cocoa.

The price rises reflect the yen's latest slide, taking it from Y120 to Y125 against the dollar since mid-May, a move with decidedly mixed consequences for Prime Minister Shinzo Abe's economic stimulus.

A weaker currency should help exporters, while higher inflation is one of Mr Abe's main goals. Economists worry, however, that rising prices for imported food will drain Japanese consumers of cash and confidence, hampering the recovery of domestic demand.

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Deploying very similar language in their press releases, each confectioner said it had done its best to absorb the cost of imported raw materials, but was now having to pass the costs on to customers.

At Lotte, the prices of its eight best-selling chocolates are up 10 percent; the largest increase at Meiji is 11.9 percent on its Banana Chocco product.

Nor is it just chocolates. The price of everything from curry to cup noodles is on the up, with food inflation running about 2 percent, compared with the flat level of core goods prices.

"We are certainly hearing more companies increasing prices in line with increasing import costs relating to the yen," said Shusuke Yamada, chief Japan foreign exchange strategist at Bank of America Merrill Lynch.

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"But the ability of the companies to raise prices is also because the deflationary mindset of Japan is disappearing, so companies are more confident passing the rising costs of raw materials on to customers."

Hiromichi Shirakawa, chief economist at Credit Suisse in Tokyo, said companies tend to use the yen as a convenient excuse for price rises aimed at boosting their margins.

"The Bank of Japan may want to argue the phenomenon shows a rising expected inflation rate," he said. "In reality, it seems to us, this is not about expected inflation as much as companies wanting to get some money back."

The bump in food prices will help keep headline inflation above zero through the summer — with propaganda benefits, at least, for Japan's central bank. The economic effect will depend on whether the boost to exports outweighs the hit to consumption.

Mr Shirakawa thinks the benefits will be modest, because sluggish global demand means low export prices are offsetting the boost from a weaker currency. Meanwhile, it will be harder to raise consumption, with wage increases for Japanese workers absorbed by higher prices at the supermarket.

"I think the average Japanese will feel they are getting somewhat poorer," he says.

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Analysts at Nomura argue that Japanese households are well able to tolerate a weaker yen but that the speed of yen depreciation makes a big difference.

"While it takes some time for the yen depreciation's positive impact on exports to be felt by the domestic economy, the prices of imported energy and domestic consumer prices rise much more quickly, effectively reducing real income levels of Japanese households," noted economist Tomo Kinoshita in a report.

With Japan's economy trundling forward, the path of the yen is likely to depend greatly on how fast the US moves towards a rise in interest rates, and whether China manages a soft landing for its economy.

"The yen is getting to the point where the dollar rally has been driven by technical factors and could stall at any time," said Mr Yamada.