As food prices soar, Japan braces for pain

Throughout the world, countries are grappling with higher food and commodity prices as demand continues to grow.
Washington Post Foreign Service
Sunday, March 6, 2011; 5:46 PM

IN TOKYO - A cup of coffee costs less than it did 10 years ago. Same goes for a meal of fish and rice -- or even a shot of sake. At Yoshimasa Kaise's 43-year-old tofu shop, a block of tofu costs 150 yen, or roughly $1.80. Kaise can't imagine what customers would say if he raised the price to 155.

Economists, though, now say that soaring global wheat and corn prices will soon be felt in Japan, potentially complicating the country's economic recovery and forcing debate on a complex set of social and political issues. Japan maintains some of the highest agricultural tariffs in the world to protect its dwindling agricultural sector. Yet this island nation is also heavily dependent on food imports, and the combination of steep tariffs and rising world prices could prove difficult for policymakers once the impact is felt by consumers and business owners.

Coming amid two decades of economic stagnation, economists worry that rising food prices could force some shopkeepers out of business or prompt consumers to scale back other spending - perhaps prolonging the country's current bout of falling prices. That condition, known as deflation, can be as corrosive to an economy as prices that rise too fast.

"[The] Japanese are simply not seeing increases in salaries," said Hiroshi Watanabe, a senior economist at the Daiwa Institute of Research. "In China, incomes are always rising, so if commodities go up 5 percent, they can handle it. But in Japan, we feel the pain of the increases."

With annual per capita income of roughly $40,000, food prices are not the sort of problem they are in the Middle East or Africa, where rising costs are estimated to have forced millions into poverty and stoked anti-government protests.

The U.N.-backed Food and Agriculture Organization said that in February its global food price index hit a 20-year high.A report produced last week by Japan's Ministry of Agriculture, Forestry and Fisheries details factors behind the price climb: weather disasters in Australia and Russia; export restrictions in Argentina and Indonesia; the changing diet in countries like China, where increased appetite for beef and pork has raised demand for the grains that feed those animals.

Oddly enough, Japan has tried for years - with relaxed central bank lending policies and billions in stimulus money - to coax its economy toward steady inflation. But no method yet has worked, and a "cost-push" inflation isn't what the country wanted. For 23 straight months consumer prices have fallen in Japan. Though financial forecasters predict a better year for the country's major export companies, those improvements are unlikely to boost household incomes.

With consumer purchasing power frozen, food sellers - nationwide grocery store chains and small tofu shops alike - try to keep prices steady so they don't lose customers, either absorbing higher costs or forcing them on to wholesalers and farmers. Japan hasn't yet seen food price spikes at the check-out aisles, but the country's patchwork of small-scale importers and co-ops are feeling the pressure. Some have laid off part-time employees. Some have reduced transportation costs. Some, University of Tokyo environmental economist Nobuhiro Suzuki said, will soon go out of business.

"Consumers think that so long as prices don't rise at the grocery store, they're OK," Suzuki said. "But that is not true."

For Kaise, 76, who runs the tofu shop with his wife, cost-cutting is even more difficult, because there are few layers between the overseas farms that grow his soybeans and the customers who buy them. The co-op where Kaise buys his soybeans has already raised the price. Kaise can't cut down on transportation costs, given that he often rides his bike when making deliveries to restaurants. He can't cut electricity costs, either. When he works during daylight hours, the front door of his store remains open - and the lights remain off.

"I've thought about making the tofu blocks smaller," Kaise said, "but I haven't done that yet. I am still absorbing the losses."

According to Eiryu Sanatani, the Ministry of Agriculture, Forestry and Fisheries food security director, some of the pressure on Japan's food sellers comes from increasingly difficult competition with China. By 2020, for instance, China will account for half of the world's soy consumption. It buys in bulk to feed the world's largest population and its rising yuan gives it a competitive advantage to outbid other countries. China's soy imports rose 14 percent from 2009 to 2010. Sanatani forecasts an even larger increase from 2010 to 2011.

The rise in global food prices has also corresponded with a fierce domestic battle in Japan over the benefits of joining a landmark free-trade agreement - which would threaten Japan's already-dwindling agriculture industry by reducing steep tariffs on imports. Japanese Prime Minister Naoto Kan, pushing to liberalize Japan's agriculture sector, says the Trans-Pacific Partnership (TPP), which includes the United States, would open new markets for Japan's exports and boost the economy at large. Opponents of the TPP say that joining would further decrease Japan's food self-sufficiency, already at just 40-percent, and leave Japan more susceptible to worldwide food price changes.

Both proponents for and opponents of the TPP have latched onto the food price spike to amplify their arguments. A healthier overall economy, supporters say, can help Japan better handle topsy-turvy commodities costs. Protected domestic agriculture, opponents say, is the only way to buffer Japan from future crises.

"But this time around," Watanabe said, "it will be very difficult to do anything. Japan is a country that imports its [food] resources, so we just have to absorb these rising prices. That means sharing the burden throughout the economy."

Special correspondent Akiko Yamamoto contributed to this report.

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