Japan's small companies are near the end of their tether, squeezed between rapid rises in raw material costs and customers unwilling to pay more, deepening concern about the economy as big exporters face slowing global demand.
While Japanese giants such as Toyota, with their strong brands, have boosted exports and kept Japan growing, it is the many small businesses around them that employ most workers.
The government acknowledges growth is stalling and the fear is that, if exports slow off the back of a United States downturn, weakness in wage growth because struggling small firms cannot boost salaries will see Japan dip into recession.
"Headwinds against the corporate sector warrant attention as they may lead to further deterioration in wages and put a cap on consumption," said Kentaro Mukai, an economist at the Cabinet Office.
Rising costs are not limited to any one country, but Japanese have lived through a decade of deflation so the customers of the country's small firms shrink away from accepting price increases. At the same time, small firms face soaring raw materials prices. Oil hit a record peak close to $120 a barrel on Monday, taking gains to about 80 per cent in the past year. Other commodity prices have surged too. Japan's most closely watched consumer price index rose 1.2 per cent in the year through March, a decade high that suggests prices are gradually rising.
But that is still less than a third of the wholesale inflation that businesses face, at 3.9 per cent over the same period – its highest level in 27 years.
For small firms, which employ seven out of 10 Japanese workers, the pain is showing up in smaller profits and rising bankruptcies. Dry cleaners are one example. They are among those pressed as prices of fuel for their delivery vans, cleaning solvents and plastic packaging all rise. But consumers used to a decade of falling prices have resisted price increases, says the Tokyo Cleaning Association, which represents around 2,300 dry-cleaning firms.
Cleaning a suit cost around 1,330 yen ($12.74) in Tokyo, up only 0.8 per cent from a year earlier. Over the same period, some raw materials prices have risen 50 per cent to 80 per cent, the association says.
"Although the shops appear to have begun to step up price increase recently, some cleaners could eventually decide to close their shops if oil prices continue to rise further," said Etsuo Mizoguchi, an executive-director at the association.
A government survey late last year showed 61 per cent of small companies could not raise prices enough to keep up with rising costs.
A private survey found business bankruptcies rose 7.7 per cent in the year to March, more than 60 per cent of which were made up by small companies. Profits at small firms fell 5.9 per cent in the year to March 31, while those of big companies were flat, the Bank of Japan's tankan corporate survey showed this month.
To try to cope, small businesses have cut wages, hitting consumers who are already a weak link in Japan's economy, suggesting little chance for a pick up in domestic demand.
Ironically, Japan's economy is experiencing its longest period of growth in decades, but a slowdown is apparent. Analysts expect the Bank of Japan this week to cut its official 2008 growth forecast to around 1.5 per cent from a previous 2.1 per cent.
"Just when we could expect that the longest recovery cycle in the postwar time would ease the disparity between large and small businesses, along came the rise in raw material costs," said Naoko Ogata, senior economist at Japan Research Institute.
The economic pain may get worse before it gets better, with even large corporations facing a profit squeeze as the US economy slows.
These dangers were highlighted last week when data showed that Japan's March exports to the United States fell 11 per cent from a year earlier – the biggest fall in more than four years.
"Decelerating worldwide growth is taking a toll on Japan's exports gradually, as the slowdown in the United States is having a ripple effect on the global economy," Hiroshi Shiraishi, an economist at Lehman Brothers in Japan, said after the data was released.
Those prospects add to the pessimistic mood among smaller companies. So far, small chemicals manufacturer Marktec has managed to pass on to its customers the price rise demanded by oil refineries that supply it with raw materials.
"They are not requests," company director Shinichi Saito said of the price rices. "We have no choice when they say they can stop the supply." But it is unclear how much longer the steel and car manufacturers that buy Marktec products will be so accommodating, with price increases from two to three per cent every few months to five per cent, as oil keeps climbing.
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