Why are prices so DAMN high?!
If you haven’t seen the news lately, Tokyo and Osaka have just been declared the most expensive cities on the planet (again). What makes Japan so expensive? Why? And does it have to be that way? What can the foreign resident in Japan do to avoid getting fleeced? There is no simple, single reason. Nor, for the “MTV Generation”, who is raised and programmed to expect instant sound-bytes and have the attention span of a gnat, is there a bumper-sticker, easy quick fix. Some of the issues can and should be dealt with, others are more cultural and won’t be going away soon, if ever. It is not that Japanese are all conniving snakes hellbent on economic world conquest, nor that western companies “just don’t try hard enough”, nor it is as some naive observers say “it’s all just the exchange rates”. All these elements have some truth in them but don’t explain the reasons why. Read on to find a few of the causes–
Contents–
Land Prices, Rents, and Taxes
Cartels and Collusion
The Rigged, Bulky Distribution System
Snob Appeal
Non-Tariff Barriers
Consumer Apathy/Ignorance
1. Land Prices, Rents, and Taxes
Ask any Japanese why homes cost so much and you’ll get the Standard Party Line: “Yes, Japan is a small country with very little land, blah, blah, blah…” This of course is true. At 127 million people Japan has almost 40% the size of the U.S. population in a land space that’s a bit smaller than California. But that does not explain why a QUARTER of the Japanese population lives in or around Tokyo, or why the Shimane Prefectural government gave away land for free if you agreed to live there at least 6 mos. a year. The real reasons are found a bit deeper. In fact, most Japanese themselves, being completely apolitical, are clueless on how their government or System functions. One of the biggest reasons why Tokyo is insanely expensive is because the government is based there – and Big Business is in bed with the politicians and bureaucrats. So if Big Business is based there, that’s where all the best jobs are and where everyone wants to live. But there’s more. Japan is one of the few nations in the industrialized world that has extremely light property taxes, but if you sell a home the tax is a killer 50%! This chokes off the supply of land and for the average Japanese worker owning a home will only be a dream. Some companies 25 years ago when prices were spiraling out of control in fact were issuing loans to buy a home where your children and then grandchildren, as of yet unborn, will finish paying off the mortgage. With Japan’s economy cratering in the 1990s and now with a shrinking population every year, this is no longer the case. Land is also very expensive in cities because floor space per square meter of land is artificially restricted by government regulations. Inheritance taxes in Japan are even more devastating, so dying is a terrible thing to do to your family. Things were worse in the “Bubble Era” of the late 80s to early ’90s, which was a rampant speculative boom. Since then land prices and rents have fallen dramatically but the real causes have not been dealt with so the problem will not go away.
Still worse, the ever-meddling Japanese government has done it’s part to stick its fingers in and make things harder. The Ministry of Agriculture, Forest and Fisheries still pushes a system where there are “farmers” growing food in Tokyo-to, just to say that there are farmers in the area to have a role in policy making. So just 20 minutes by train out of Setagaya you’ll find farmers growing cabbages on land worth billions of dollars. Why? Low taxes–that’s why. But the situation is much the same in every Japanese city — the rural areas continue to depopulate, and the cities are getting more concentrated. North of Tokyo are literally thousands of square miles of land with almost no people — but the shots are called from Tokyo, so that’s where the VIPs all are. There is one more piece of the puzzle — other high taxes. Income taxes are not too vicious (to the benefit of the wealthy, of course) but high corporate taxes, sin taxes, subsidies, and an 10% Consumption Tax all take their toll. Japanese taxes on alcohol and tobacco are high (for cigarettes over half the price is taxes), and imported drinks are often cheaper than domestic ones (except for snob goods, which we’ll get to in a bit). The government also has heavy subsidies for Japanese agriculture, especially rice. The government gives huge yearly subsidies to farmers, then buys all the rice made at very high prices, and sells it at a cheaper price to avoid the wrath of the consumers. So where does the government get its money, everyone? At the same time it blocks foreign rice imports (gradually the system has been moved to tariffication, but if foreign rice is made more expensive than Japanese rice, of course no one will buy it). Lately more and more farmers are selling outside this system, and it was phased out, finally, by 2008). Previously, Japanese rice cost about seven times the world price. So even if you choose not to eat rice (the Japanese staple food), you pay for it in your taxes anyway. Gasoline is also highly taxed. Currently 54 yen of every liter’s (that’s 205 yen per US gallon) price is tax. And of course there’s the ubiquitous 10% Consumption Tax, going up in a Japan near you (and perhaps again to higher than 10% later). But Japan’s tax is applied also to gasoline and alcohol, so you’re also paying tax on a tax. It also applies to food, as well as to all parts in the production process: compounding itself more and more on durable goods. This alone raises prices on a lot of things, but we’ve just gotten started.
2. Cartels and Collusion
This is also a big factor in making prices soar through the roof. Of course Japan has lots of laws like The Anti-Monopoly Law and The Fair Trade Commission that are supposed to stop illegal practices, but the FTC has always been understaffed, underfunded, and more of a paper tiger than anything else — just the way Big Business wants it to be. And to be blunt, The Anti-Monopoly Law has hurt consumers as well, by allowing high-priced boutiques and mom-and-pops to block the establishment of big stores (which handle more foreign goods) as well as discount stores which increase competition. Currently the US is pushing for abolishment of the whole law. This may bring other troubles though. Japanese social security is woefully inadequate, which is the real reason why all Japanese squirrel away all their money and have the highest savings rate in the world. But that alone isn’t enough. So how will older couples make ends meet after retirement? The mom-and-pop store, of course. With growing numbers of elderly, this problem will reach a crisis in a few decades.
The reason why cartels and collusion are the de facto rule of the land is in the way that the Japanese market functions. And unless foreign firms learn this they are doomed to fail in Japan. In most markets in the world the goal of the firm is profit. In Japan, it’s market share. Whenever there is a new product like a Walkman introduced, every company cranks out as much of the product as they can, at razor thin profit margins (sometimes at a loss, even). Then there is a major shakeout — usually the firms that have less financial backing (i.e. they don’t belong to a keiretsu with a big bank to back them up) have to drop out. In the end, you have a small number of firms, which quickly form a cartel and jack up the prices to make money. Distribution channels are securely locked away, blocking any would-be competitors. At that point, the game is over. Japanese business also has cozy ties with Japanese bureaucrats, and often employs them after they retire in a system called amakudari, which gives them a key player with all the government connections still in place. In the 20th Century, most governments would take up anti-trust legislation; Japan has actually encouraged the growth of big firms to raise its GDP. Ever since Japan reopened itself to the world in 1868, it has been on an export craze to make money — while carefully protecting its own industries. Few Japanese even know, let alone know why, a Japanese camera costs more in Japan than in New York. A lot of the reason is that Japan is out to capture market share, while already securing it from competition at home. This kind of strategy, by the way, is why the Japanese market is the most competitive in the world, and if your company is more interested in next quarter’s profits you will not survive.
One of the more well known and blatant forms of collusion is called “dango”, which is bid rigging, usually by the massive multi-billion dollar construction firms. (Around 10% of Japan’s workers are in the construction industry). The firms divvy up the list of upcoming public projects, then each company bids higher than than the agreed upon to get the contract. The firms get a guaranteed contract at a high rate, and the taxpayer gets screwed. The projects can run into the billions of dollars, such as the construction of roads or Kansai Int’l Airport. Some action has been taken against the firms of late but since it can take over 10 years to prosecute and the fines are relatively minor, there is little incentive to be fair. Plus with Japan’s economy in a coma throughout the 90s, instead of fixing the real problems the politicians are trying to stimulate growth by throwing out more band-aids of pork barrel projects, such as building dams the local people don’t want or the infamous “roads to nowhere”. All this when there is now the worst job security since WWII, massive public debt and a banking sector staggering under bad loans, and the Japanese government is officially in debt at 130% of its GDP (the actual unofficial amount could be as high as 270%). Another case is the beverage and beer industry. When Coca-cola announced it would raise its price to 110 yen per can, every other beverage maker did the same thing. Such is a common practice, but there was no extreme need. No explanation was given, and even worse, none was even asked for. The beer industry is another example. For some reason, all 4 Japanese beer giants charge exactly the same price. The reason given? All four just happened to choose the same price at random. Of course. Nearly every industry acts this way. Domestic flights are more than double that in other countries. Companies often keep tight relationships with distributors and retailers, including advancing them capital they can’t pay back as well as training in selling. And the last thing a retailer is going to do is bite the hand that feeds him by selling a lot of foreign goods that are far cheaper. This economic policy was designed to strengthen large companies and have Japan catch up to the west after WWII. Now that Japan has caught up, however, new policies have never been implemented, and Japan is stuck with a “dual economy”. An excellent analysis of what has gone wrong was written by Richard Katz. Even the media makes an information cartel of sorts, with it’s press clubs (kisha) that all act together and keep other reporters that might report more than the official party line out. The Japanese people all get their news from a self censoring, government mouthpiece press. There is next to no mainstream investigative reporting, or whistle-blowing, deep muckraking stories of the under-the-table deals. Only when a major financial scandal erupts does it ever come out, and after a few weeks of perfunctory apologies and superficial changes, it’s back to business as usual. This doesn’t mean there is some shortage of intellectuals in Japan; the Nihon Keizai Newspaper, and magazines like Seiron, Ronza, and Gendai all offer good reporting. But it is impossible to see the inner workings of government and just how far the corruption goes. Pinning down the responsible party in nearly impossible.
3. The Bulky, Rigged Distribution System
(Or: Do you really need 3 people to wrap your hamburger?)
For a business to succeed in Japan, it needs at least 2 essential things. One of course is capital. The other, however, is control of the distribution channels, and this is where many foreign firms fall short. Japan’s distribution system is a complex maze and their are thousands of regulations to follow. This system is currently strangling the domestic economy. After WWII, Japan had millions of people who needed work fast. So a system was made that employed lots of workers, though many of the jobs were (and still are) redundant. Also there are often several wholesalers sitting between the producer and retailer, each taking their cut. This is one of the principal reasons why just sending the value of the dollar through the floorboards didn’t work. From Sept. 1985 the value of the dollar vs. the yen fell by more than half. Yet products in Japan made from imported parts/ingredients didn’t budge. The real reason was that the middlemen were eating up nearly all the savings. When the dollar hit 100 yen, the Japanese booksellers still used the old 175 yen/dollar rate, and didn’t pass any savings on to the consumers. (You’d be wise to buy whatever books you want in Japan before you come, since the very same books in Japan will cost 2 or 3 times more). In 2000 Merill Lynch economist Jesper Koll noted that Japan has 392,000 wholesalers — a staggering number. Yet two-thirds of them just sold things to each other and not retailers or producers, and four-fifths of Japanese wholesalers have less than 10 employees each. Distribution channels in Japan are extremely exclusive — usually an arrangement to carry your goods also means only your goods and no competitors. Then they have to fight it out with eachother for the store owners to carry their products on the best shelves; space being extremely limited. For decades Japanese people were told (and they accepted) the notion that higher prices were necessary to keep the whole nation employed–and Japan has had the lowest unemployment rates in the industrialized world. Also with land prices so high storage costs are also wildly expensive, and with Japan’s narrow, poky streets large and cheaper distribution is impossible. Docking fees for ships and planes is also insanely high, and it can cost more to ship something across Tokyo than to ship it across the world. High gasoline taxes and expensive electricity also make transport more expensive. In many ways Japan’s distribution system makes up the largest Non-Tariff Barrier (NTB). Other NTBs will be mentioned later.
4. Snob Appeal
After jumping in head-first into Japanese life, and satiating yourself trying all the typical Japanese delicacies and drinks, the ex-pat here sooner or later starts to yearn for a little taste from home. Yet if you go to the specialty store you’ll immediately find that those foods you grew up with, chili, wine, salsa, tacos, soups, cheeses, etc., are all 2-5 times what you paid back home. And if you want to find some perfume, make-up, or Beverly Hills type of gift, the difference is even worse. This is one cultural factor not mentioned in many books. For decades Japan has kept out or highly taxed foreign products for so long that today ANY good that sells from the West immediately has a halo of luxury around it. And for snob-goods, the higher the price, the higher the demand for it. So don’t be surprised to hear about $30 lipsticks or $300 Nike Air-Maxes. Frozen flour tortillas can go for 800 yen a dozen, more than 5 times the price in the US. Concert tickets can cost $100 or more. Sports equipment also commands a high price. And when Johnny Walker Whiskey tried to raise demand by cutting prices on it’s JW Black, demand went DOWN, not up. Even a $5 memo pad from the US is going for $21 in Japan.
5. Non-Tariff Barriers
Up to the ’70s, there were literally thousands of regulations holding back imports. Now there are just hundreds. Today even Japanese Big Business is learning that in order to compete it needs less governmental entanglements. Japanese telephone cartels are suddenly getting competition from call-back companies based abroad, which used to charge 80% less than the Japanese. Today, nearly all the formal tariff and quota barriers are gone. Some apologists declare Japan to be just as free as everywhere else. Yet, market penetration for many foreign goods is still insignificant. The reason? The NTBs. Some laws make up some, such as the prohibition of discount prices on books or CDs, thus blocking or delaying any healthy competition or net commerce like Amazon.com. Today after years of unmet consumer demand, the Ministry of Health, Labor and Welfare is still deadlocked on allowing OTC medicine sales online. The rigged distribution keiretsu also forms one, complicated licensing procedures are another, as well as other barriers that also include the language and cultural differences. Some of these things the West simply can’t pressure Tokyo for abolishment. If you want to buy something, you can use any language that you want. But if you want to sell something, you MUST speak the language of your customer. And even if English is the de facto lingua franca of the world, Japanese by and large can’t speak English effectively. Yet few westerners ever learn Japanese to the extent to conduct business transactions.
Japanese shoppers are also picky and conservative. Goods with a small scratch, dent, or blemish simply won’t sell unless you cut the price way down, and few shoppers are willing to try something different. They think (and in many cases are RIGHT) that Japanese products are as good, if not better than foreign products. So why change brands when you know you’re satisified with what you’re using now? Plus, many US firms are still ignorant of Japanese culture and buying behavior, and think whatever advertising works in the US is good enough anywhere else.
Other problems are that foreigners expect the Japanese market to work the same as other nations, and it clearly doesn’t. On the US-Japan trade deficit, more than 2/3 of it is in cars. But US car makers don’t bother making special models that take into consideration Japanese consumer preferences, taxes on engine size, or Japan’s cramped streets, so many models are too pricey or big. And when it comes to luxury cars the Japanese would rather drive a BMW or Mercedes. Some US and European companies have bought stock of struggling Japanese firms; how much this will change things is still yet to be seen.
6. Consumer Apathy/Ignorance
One other significant but often glossed over barrier is the nature of the Japanese themselves. This too is a problem which won’t be going away overnight. While in the west people are taught to think critically and analyse, Japanese are taught all the more to put up, shut up, and do what they’re told. Thinking is again a group-oriented activity. In this group is a strong “village mentality”, and anything outside the group is generally secondary, or worse, ignored. Charity and grassroots movements are nearly unheard of in Japan. The ideas of personal growth, individual liberty, and privacy are not well defined in Japan. In fact, there is no real Japanese word for “privacy” at all, and the English word privacy has been borrowed (purabashi). Many Japanese in fact mistakenly equate individualism with selfishness. Standing up for yourself is another new concept to Japanese. So whatever retailers charge, the Japanese just pay, no questions asked. A lot of Japanese media and TV also use sensationalism to sell, and objective reality is often trampled over. What’s that? Don’t you pay $25 for a melon and $18 for a bottle of aspirin?? Must be something wrong with your country’s products — there have been lots of stories about shoddy or “dangerous” foreign goods…
And why are so many Japanese like docile sheep ready for the slaughter? Several reasons. One is the educational system, which is based on rote memorization. There is no critical thinking involved — only feeding back data. The goal is not real learning, it is only to pass the entrance exam for the next level up. Hence, Japanese memorize mile-long lists of English vocab and grammar, but are completely incapable of holding the simplest conversation. The same for every other subject. Once you get into college, everything learned is forgotten and the party begins. Many students are so burned out after cramming every night for years that they understandably have no interest in anything but getting some R&R, and have no knowledge or interest in anything else. Then they join a company and the whole grind begins all over again. Throughout, the group enforces rigid conformism. Individualism, genius, and creativity are squashed. The System is very good at mass producing obedient workers for Big Business. So what happens when you want change in government? Most people in other nations would vote for a reform candidate in the next election. Who’s the reform candidate in Japanese elections? You’d never know. In many countries, there’s a debate, tv/radio discussion, etc. In Japan, elections consist of trucks that run around with speakers blaring, “Thank you! Thank you! Thank you! My name is Tanaka, thank you! Thank you! Thank you!” Nothing concrete ever gets mentioned or promised by the candidates — except buying votes through pork barrel projects, and nothing is demanded by the people. In fact, many people vote the way their companies tell them to — whichever candidate will help out their business or grant more pork. Few politicians can do much of anything anyway since the bureaucrats can obstruct whatever they want and are never voted out.
Worse yet is the bland, toilet-trained media, which when it comes to reporting politics gives “news” of, “The government stated today that blah blah blah”, end of story. Some hour long news show 10 minutes of news, and 45 minutes of sports and weather. Just as in products, there is the media information cartel called the “kisha”, which is the press club. Do anything daring or report anything more than the National Party Line and you may find yourself frozen out of the Club and press conferences. Non-Japanese news sources have often caught the scoop on a scandal, since the Japanese don’t do any deep probing and there are no laws to protect whistleblowers from retaliation. Even so, more and more of the Japanese people are shopping abroad. Yet very few EVER wonder why Japan is so expensive. Most Japanese are completely apolitical and areligious anyway. The news is stodgy and little more than something that should be given to insomniacs who don’t respond to strong drugs. So what do they do with their time? Usually drinking, smoking, karaoke, sports, and dashing madly from one fad to the next. Here today, gone tomorrow. Out of sight, out of mind.
Conclusion, and Protecting Yourself
To end on a positive note, things are slowly improving in Japan. Continued pressure from many nations as well as yet another year of the Japanese economy in Intensive Care is finally resulting in some modest reforms and increased competition. Discounters are bypassing some redundant regional wholesalers, gasoline prices and rents are falling. Much more needs to be done, but at last the ball is rolling. And remember, Japan is just one country – there are others like Australia and in Europe that can have even worse prices for some things.
Also remember that most of these issues deal with living in Japan. For tourists going to Japan, there is a long list of special discounts and bargains you can take advantage of, including numerous rail and bus passes, special air fares, and accommodations which can suit almost any budget – far better than in many other countries, in fact. Today you can fly to many places in the country and abroad on dirt cheap low cost carriers like Peach, or Jet Star. For those in the Kanto area (Tokyo) there actually is an excellent rail pass, the Tokyo Wide Pass, that foreign residents and not just tourists can take advantage of – and there are over 3 dozen great day trip options in the Tokyo area. The Tohoku Area Pass as well as JR East Nagano Niigata Area Pass are now also available for residents as well as tourists, offering a huge portion on the country for discount rail travel, that Japanese themselves can’t take advantage of. Not to mention there are some very inexpensive hotels in Japan to suit any budget – maybe way cheaper than your own home country.
So what can you do to avoid Consumer Rape? Several things. Don’t keep your money in a Japanese bank — you’ll get negligible interest on it. Avoid big department stores for most items — you’ll never find a bargain. Look for the discount stores near you–they are slowly increasing. Learn to cook your favorite foods–it beats paying $30 at a restaurant. If you’re large, bring as many clothes and shoes with you as you can. If you’re a woman, bring lots of make-up. Look into mail order such as The Foreign Buyer’s Club, and cheaper stores like Don Quijote or Costco in Japan. See whatever movies and videos interest you before coming to Japan, since movies are very expensive here, as well as censored and delayed up to a full year. Some narrow city streets in Japan have several vendors selling cheaper vegetables and fruits. Have your friends and family mail you vitamins, OTC medicines, cosmetics, books and videos, instead of paying through your nose for such things in Japan. Use Skype or sign up with a cheaper company for international phone calls – otherwise get ready to bend over and grab your ankles. There are lots of other ideas. Use your imagination a bit. Those that survive here are people who can MAKE DO WITH LESS.
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