27 June 2023
Japan Snapshot: Japan Welcomes Inflation
Immigration queues
Share this page  
Japan Welcomes Inflation

The nail that sticks up gets hammered down, according to a popular Japanese saying; but after decades of stagnant prices, the real standout looks to be Japan itself.

The TOPIX and Nikkei 225 indices have rallied this year to their highest levels in over three decades. The Tokyo Stock Exchange is urging firms to improve capital efficiency and boost shareholder returns. Warren Buffett is on a buying spree. Ongoing economic recovery is driving earnings growth. And now, for anyone too young to remember the bubble economy of the 1980s, Japan faces a most unfamiliar phenomenon: inflation.

The country is far from alone in having to deal with a rising cost of living – the IMF forecasts IMF forecasts a global headline rate falling from 8.7% in 2022 to 7.0% in 2023 – but Japan is the nail that sticks out because inflation is something to be welcomed, not feared, as a boost to job mobility and wages, productivity, and the economy as a whole.

Given the benefits, then, why have firms taken so long to act? One aspect is a question of momentum: decades of deflation have made the public highly sensitive to price changes, and the sense that shoppers might react badly and take their business elsewhere has, until now, left companies afraid to stick their necks out. Covid disruptions and Russia’s invasion of Ukraine have made consumers more willing to swallow higher prices – and JPY 270 trillion in household savings built up through government stimulus payouts and reduced spending during the pandemic have provided a useful buffer.

Another driver is a recent government push for firms to pass through price increases to ease pressure on subcontractors. In another example of nails that stick out, household names don’t want to be seen as treating smaller suppliers unfairly. Japan’s Fair Trade Commission published a list last December of 13 companies unwilling to discuss price hikes with suppliers; this “name-and-shame” approach looks to be having an effect, with statements from the likes of auto components manufacturer Denso (6902), which announced an almost 10% hike in supply chain spending , and logistics player Sagawa Express (9143), promising better communication with subcontractors and raising delivery fees by an average of 8%. Fast forward to the present, and the latest spending and policy draft released by the Cabinet Office earlier this month stresses the need to support further wage hikes at the SMEs that employ 70% of the country’s labour force through a combination of fair price negotiations and tax breaks.

All this provides the perfect opportunity for Japan Inc. to raise prices, with much less risk of a single company becoming the nail that sticks out.

Just one problem with the nail and hammer analogy: Japan is not the fully homogenous society that the saying implies, and this is particularly true when it comes to stock picking. As the country leaves behind decades of deflation and moves into a new era of growth, an active approach based on strong fundamental analysis will be key to finding companies with a competitive edge and greater pricing power.

About the author
Tetsushi Wakayama, Japanese Equity Portfolio Manager
TMAM all-rounder, serving as economist, strategist and global equities analyst before moving to Japanese equities in 2020, first as investment research analyst covering banking, financials, and consumer electronics, and now as a member of the firm’s flagship GARP strategy portfolio management team. Tetsushi is also a long-suffering but optimistic supporter of the Chunichi Dragons baseball team.

The information contained in this document is intended solely for the purposes of information only and is not intended as an offer or solicitation by anyone in any jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. This report has not been reviewed by the Monetary Authority of Singapore.

Path 242