By Daniel Leussink and Tom Bateman
TOKYO, March 22 (Reuters) - In the coming years, Satoaki Kanoh needs to replace almost a dozen ageing machines at his Tokyo-based maker of acrylic panels, a major undertaking that he worries will become even more expensive.
"Ideally, I'd like to do one a year. But I don't have that much money," Kanoh said of the customised pieces of machinery that cost around 50 million yen ($330,000) apiece.
"If we have to pay a lot to borrow, we could end up in a really tough spot."
Japan's central bank this week raised interest rates for the first time in 17 years and scrapped its negative rates policy. While the move is more symbolic than anything else - rates remain pinned near zero - it has nonetheless opened the door to something Japan hasn't seen in decades: a world where it will cost more to borrow money.
Now, millions of Japanese, from small business owners like Kanoh to first-time homebuyers, are sizing up how to adapt to higher borrowing costs after the long, lean years of deflation, when prices, wages and the cost of money changed little.
How they cope will have vast implications in an economy where small and medium-sized companies employ some 70% of the workforce and private consumption accounts for more than half of the gross domestic product.
Kanoh worries about the potential pace of rate increases. Too much too quickly and Japan won't be able to adapt, he said.
His company, Shinshi Co., has about 100 million yen in loans now, but that's at a fixed rate.
Even on a smaller loan of about 10 million yen, the difference between 3% and 1% would be considerable, with the annual interest payment on 3% equivalent to an one employee's monthly salary, he said.
DEFLATION PLAYBOOK
Japanese companies and households have long stuck to a deflation playbook: hoard cash and cut costs. That left the economy in a vicious cycle of stop-start growth and flat-lining wages.
Shaking off that deflationary mindset, may prove difficult, even as prices, and some wages, go up.
While big companies are now giving some of the largest pay increases in decades, it's less clear how much will trickle down to smaller firms.
Around 60% of Japanese firms expect rates to rise to 0.25% by the end of the year, a Reuters survey showed on Thursday. Many said they are looking to front-load spending before borrowing costs rise.
Eiichi Hagiwara, who owns a Tokyo-based designer of water treatment equipment, says higher borrowing costs could eat into the already razor-thin margins at small companies.