Consumption tax rise gives Abe something to chew on

March 27, 2014 9:16 am

Consumption tax rise gives Abe something to chew on

By Jonathan Soble and Jennifer Thompson in Tokyo

Call it the “beef bowl test” for Abenomics. On Tuesday, when Japan carries out a controversial increase in its national sales tax, the country’s two leading purveyors of gyu-don – cheap and hearty sliced beef on rice – will respond in starkly opposing ways: one by cutting prices, the other by raising them.

The fast-food chains, Sukiya and Yoshinoya, now charge an identical Y280 ($2.70) for their most basic meals, and Japanese media have labelled the split the end of “gyu-don parity” – a portentous description that hints at the stakes involved in the 3 percentage point tax rise, both for individual businesses and the economy as a whole.

The increase in the consumption tax – the first in 17 years – is testing companies’ pricing strategies and, by extension, their confidence in the economic recovery fostered by Prime Minister Shinzo Abe. After nearly two decades of deflation, Japanese consumers are unaccustomed to rising prices, and the recovery has so far done little to raise their incomes, making many businesses afraid to charge more for fear of losing sales.

“Pricing is going to be crucial to seeing whether Abenomics is working or not,” says Masamichi Adachi, chief Japan economist at JPMorgan. “Some companies see an opportunity to gain share, while others think deflation is over and customers will support higher prices. The test over the next few months will be to see who is right.”

In the gyu-don world, Sukiya is a pessimist. “With the increase in consumption tax, disposable incomes will shrink, so to ensure that customers can continue enjoying Sukiya gyu-don, we are making efforts as a company and offering the same delicious meal at a lower price,” says the 2,000-outlet chain.

Starting on Tuesday, Sukiya will sell its standard gyu-don – a favourite of students and cost-conscious salarymen alike – for Y270, Y10 less than previously even with the additional tax and about Y100 less than a McDonald’s Big Mac. By contrast, Sukiya’s rival, Yoshinoya, is raising its price by Y20 to Y300 after-tax – an amount equal to the added levy plus a little extra.

Equity investors, at least, appear hungrier for Yoshinoya’s margins-first approach: since the imminent end of “gyu-don parity” became clear in mid-March, its shares have outperformed those of Sukiya’s parent, Zensho, by more than 5 per cent.

Similarly fraught calculations are being made across the economy. According to a survey by the Nikkei business daily late last year, roughly four in 10 businesses plan to pass the entire value of the tax increase on to their customers. That helps explain why analysts think that much of the inflationary pressure that has taken hold in Japan will dissipate after April 1.

The tax rise is a big risk for the economy and Mr Abe. The The last time Japan raised the consumption tax, from 3 to 5 per cent in 1997, the economy fell into a deep recession, voters punished the ruling party and the prime minister of the day resigned. Pessimists fear a repeat, while optimists counter that Japan is better prepared this time around – last time, it also had to contend with the Asian financial crisis and a domestic banking crunch. Even the most bullish forecasters expect a contraction in the April-to-June quarter; the question is how severe and long-lasting it will be.

Some retailers, such as the Takashimaya department store group, are handing out gift vouchers that can be redeemed after the tax rise, to try and bring customers in during the worst of the expected slump. Carmakers are expecting a 15 per cent year-on-year fall-off in Japanese sales in the short term, though it is more domestically-focused industries such as restaurants and retail that have the most to lose.

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Some businesses face unique pricing dilemmas. Japan’s ubiquitous vending machines do not take coins smaller than Y10, leaving beverage companies with the choice of absorbing the additional tax or raising their prices by more than twice the Y3-4 that the rise would otherwise require. Coca-Cola, the industry leader with nearly 1m machines nationwide, plans to raise its prices, but some discount operators are holding fast.

For companies that see the tax rise as good cover to charge more, higher input costs are a motivating factor. The yen’s sharp decline since late 2012 has made imported raw materials more expensive – beef, for instance, in the case of the gyu-don chains – and many businesses are keen to recover the added costs. Some will offer less instead of charging more – local favourite Kewpie mayonnaise is shrinking its 500ml squeeze bottle to 450ml, for example – but the effect is the same.

Go Ikeda, a dry cleaner who offers home pick-up and delivery, says his company plans to pass on the full tax rise to customers and may raise prices further, to cover higher costs for cleaning chemicals and petrol. “We’re trying to hold down prices as much as possible, but our materials costs are going up, so it’s hard,” he says. “We have to judge the right timing to raise prices.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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