Prices in home furnishings in Japan are expected to rise gradually as a result of Prime Minister Shinzo Abe’s sweeping programme of fiscal and economic reforms aimed at restoring the country’s economic growth. Although large players such as Nitori Co Ltd and Inter IKEA Systems BV in home furnishings have decided to absorb the costs associated with currency devaluation and consumer tax increase, a highly fragmented market is expected to lead to inflation in the long run as smaller players raise prices.
Currency devaluation absorbed by large players
As part of Mr Abe’s growth programme, currency devaluation in Japan has placed a heavy burden on the home furnishings industry. With most players relying on furniture imported from foreign countries such as China and Indonesia, a devalued yen in home furnishings means higher import costs and lower profit margins.
In spite of economic pressure, Nitoria and IKEA, both widely associated with value-for-money offerings, declared in May that they would not increase their prices in the short term.
Most home furnishings players use forward currency exchange contracts to anticipate yen depreciation. But if yen weakness persists, many will have to modify their procurement sources and primary materials.
Nitori Co Ltd plans to absorb depreciation costs by reviewing its materials and procurement channels. In addition, it aims to increase its proportion of high-margin products by replacing 60% of its offerings compared to 30% this year. Although these measures are likely to secure Nitori’s growth, they are not expected to prevent a general slowdown for the Japanese manufacturer.
In other industries, currency devaluation has led major luxury brands such as Chanel, Fendi, Prada, Dior and recently Apple to increase their prices by up to 20%. Significantly, these are all imported goods.
Double Hit: VAT increase is coming
Japanese consumer tax is expected to place a further burden on prices in home furnishings as discussions about gradually increasing consumer tax evolve at government level.
VAT is set to rise from a current rate of 5% to 8% in April 2014 and eventually to 10% in October 2015, leading Japanese consumers to invest in higher-end home furnishings products in anticipation of the tax hike, pulling some demand forward.
To preserve their value-for-money profile, some retailers such as Nitori have decided to take a hit to their margins and absorb the cost of VAT.
Market fragmentation to foster long-term inflation
Although currency devaluation and consumption tax absorption from major players may secure price stability in the short run, market fragmentation in home furnishings is expected to cause prices to rise gradually as smaller players become unable to stomach policy costs.
In an attempt to protect small manufacturers from high price differentiation, the Japanese parliament enacted a law on 6 June 2013 which prevents large retailers from imposing VAT costs on suppliers. The new legislation, effective through to March 2017, also bans advertisements using expressions pointing towards VAT discounts for consumers.
These trends are expected to cause prices to gradually increase as a whole in the Japanese home furnishings industry. Otsuka Kagu Ltd, the third largest furniture and homewares retailer in Japan after Nitori and IKEA, has already implemented its first comprehensive price hike in about six years, raising prices by 0.2-14.2% on nearly 10% of its line-up.