Japan is on the cusp of a new wave of price hikes

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Japan is on the cusp of a new wave of price hikes

A Gyudon bowl of rice topped with beef is a popular dish in Japan. In 50 years of running a cafe in Tokyo, Shizuo Mori Can't remember any time when his coffee supplies cost this much.

The 78-year-old owner of Heckeln, an old cafe in the business district of Toranomon, says that the wholesale cost of his main product has rose 5% in the last three months.

That is a jolting experience for a country where weak growth has meant that prices of many things - including wages - haven't risen much in decades.

While he has not yet passed on the increase to his customers - coffee at his cramped shop costs 400 Yen $3.50 a cup - price pressures are squeezing his bottom line and he knows his regulars have low tolerance for such hikes.

Salarymen get paid a lot, so everyone will stop drinking if prices are too high, said Mori, who shop is famous for its caramel sauce pudding, slabs of buttered toast and ham and egg sandwiches.

Across Japan, consumers and businesses like Heckeln face sticker shock for everything from coffee, beef bowls and other items whose prices have barely budged during the country's decades of deflation.

Japan's core consumer inflation - which excludes fresh food prices - only stopped falling in August, snapping a 12 - month deflationary spell. In the coming months, economists and policymakers expect official price increases to come reflected in recent data.

Although Japan's inflation is still modest by global standards, surging raw material costs have made it almost impossible for firms in the third-largest economy to pass on wholesale price hikes, something they have traditionally resisted for fear of losing business.

For younger Japanese, many with no memory of significant price hikes, this came as a surprise especially as households, workers and businesses struggle to shake off the economic hit from the pandemic.

It's awful - incomes haven't changed. People are increasingly becoming poor, said Yuka Urakawa, 23, who works in the beauty industry and is going to a noodles dinner near Yurakucho station of Tokyo.

Like many on social media, she has noticed changes in the price of beef bowls at restaurant chains like Matsuya Foods.

At most of its outlets, Matsuya replaced the 380 yen standard beef bowl and started offering regular bowls using cheaper ingredients such as frozen beef and Chinese spring onions for the same price.

Dairy products maker Meiji Holdings has raised the prices of its margarines by up to 12.8%, the first increase since 2008. Other food companies have also hiked prices on their main product lines for the first time in years.

While not necessarily welcomed by consumers, the trend may be starting to distort the way Japanese perceive the prices they pay for staples.

It feels like Japan's prices were too cheap compared to others, said Nozomi Yuasa, 28, who also had dinner near Yurakucho station and noticed price hikes in eggs, dairy and candy.

Tankan Business Survey of the Bank of Japan this month showed more companies with higher input costs, indicating further increases in price they charge their customers.

While stoking stagnant consumer prices has been the main objective of the central bank for years, its strategy has been to do so by improving demand. On the other hand, inflation caused by restricted supply is unwelcome, especially when it's not matched by increased wages.

Aware of households' sensitivity to price hikes, some firms tread cautiously. Aeon Co Ltd, Japan's largest retailer by sales, said it won't raise prices on about 3,000 products of its own brand Topvalu products this year, instead seeking to keep cost low in part by bulk-buying.

Japan's demand recovery is lagging due to the coronavirus, said Hiroaki Muto, economist at Sumitomo Life Insurance Co.

If the price rises, it will result in lower demand.