Japanese Inflation: signs of meaningful change
World in Motion – Global equities blog

Japanese Inflation: signs of meaningful change

In 2016 Akagi Nyuguyo, a Japanese frozen dessert company, raised the price of its popular Garigari-kun children’s iced lollies following a sharp rise in costs. It increased the price from Y60 to Y70, equivalent to a rise of around six pence. This was the first price hike in 25 years.

At the time, price increases in Japan were incredibly rare; Japan had suffered deflation for the best part of two decades. A “deflationary mindset” had formed where people did not expect prices to go up and, when they did, they were typically not well received. This explains why, after the event, Akagi Nyuguyo took out a 60-second television advertisement in which the company’s management and staff can be seen bowing in apology to its customers. Japan – whole staff apologize for raising their price of the Icebar by only 9 cents – YouTube

 

Japan’s economy has experienced very mild inflation for most of the past decade. However, the deflationary mindset still exists, impacting household and corporate behaviour. Until recently, price increases remained elusive; wages have also not risen despite tight labour markets. In the absence of notable inflation, households hold more than half of their savings as cash instead of investing in higher-returning asset classes.

Inflation rising ahead of earnings
Japanese inflation

Source: Bloomberg 25.07.2023

Fast-forward to today, and the aversion to price increases has shifted dramatically. Suddenly, following the latest surge in costs, companies are racing to raise prices to protect their earnings. This is a significant break from past behaviour when companies would protect consumers from rising costs and instead suffered lower margins themselves. It represents a shift in Japan’s “deflationary mindset”.

We also sense a change in the attitude towards wage increases. Wages are currently rising at the fastest pace in over 20 years. But we do not see this as evidence that Japan’s deflationary mindset is changing; the growth in wages has not kept up with inflation and real incomes have fallen. Nor do we see strong evidence for now that, against a backdrop of labour shortages, workers are demanding higher pay, even though it may be true in certain pockets of the labour force.

Where we see more evidence of change is in the attitudes of company management teams. Multiple companies have told us that, when setting longer term business plans, they now assume wages in Japan will rise for the first time in a generation. Many managers we have spoken to accept that wages in Japan are currently low, and can increase without impacting a company’s competitiveness

Is this the start of a new, more inflationary era for Japan? Much of the inflation we have seen in Japan in recent years has been driven by rising costs of imports, which have subsequently worked through the system with a lag.

In the past, as these costs have faded, so has inflation- and Japan’s deflationary mindset has remained steadfast. However, we believe that this time is different. We see clear signs that attitudes are changing. Change takes time, but change is happening- Japan’s deflationary era is coming to an end. This will have important consequences for Japan’s economy, policy, and markets.

26 July 2023
Lee Alex
Alex Lee
Portfolio Manager
Share article
Share on twitter
Share on linkedin
Share on email
Apple web badge
Spotify web badge
Listen on Stitcher badge
July 2023
Share article
Share on twitter
Share on linkedin
Share on email

Important Information

For use by professional clients and/or equivalent investor types in your jurisdiction (not to be used with or passed on to retail clients)

This document is intended for informational purposes only and should not be considered representative of any particular investment. This should not be considered an offer or solicitation to buy or sell any securities or other financial instruments, or to provide investment advice or services. Investing involves risk including the risk of loss of principal. Your capital is at risk. Market risk may affect a single issuer, sector of the economy, industry or the market as a whole. The value of investments is not guaranteed, and therefore an investor may not get back the amount invested. International investing involves certain risks and volatility due to potential political, economic or currency fluctuations and different financial and accounting standards. The securities included herein are for illustrative purposes only, subject to change and should not be construed as a recommendation to buy or sell. Securities discussed may or may not prove profitable. The views expressed are as of the date given, may change as market or other conditions change and may differ from views expressed by other Columbia Threadneedle Investments (Columbia Threadneedle) associates or affiliates. Actual investments or investment decisions made by Columbia Threadneedle and its affiliates, whether for its own account or on behalf of clients, may not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not take into consideration individual investor circumstances. Investment decisions should always be made based on an investor’s specific financial needs, objectives, goals, time horizon and risk tolerance. Asset classes described may not be suitable for all investors. Past performance does not guarantee future results, and no forecast should be considered a guarantee either. Information and opinions provided by third parties have been obtained from sources believed to be reliable, but accuracy and completeness cannot be guaranteed. This document and its contents have not been reviewed by any regulatory authority.

In Australia: Issued by Threadneedle Investments Singapore (Pte.) Limited [“TIS”], ARBN 600 027 414. TIS is exempt from the requirement to hold an Australian financial services licence under the Corporations Act and relies on Class Order 03/1102 in marketing and providing financial services to Australian wholesale clients as defined in Section 761G of the Corporations Act 2001. TIS is regulated in Singapore (Registration number: 201101559W) by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289), which differ from Australian laws.

In Singapore: Issued by Threadneedle Investments Singapore (Pte.) Limited, 3 Killiney Road, #07-07, Winsland House 1, Singapore 239519, which is regulated in Singapore by the Monetary Authority of Singapore under the Securities and Futures Act (Chapter 289). Registration number: 201101559W. This advertisement has not been reviewed by the Monetary Authority of Singapore.

In Hong Kong: Issued by Threadneedle Portfolio Services Hong Kong Limited ????????????. Unit 3004, Two Exchange Square, 8 Connaught Place, Hong Kong, which is licensed by the Securities and Futures Commission (“SFC”) to conduct Type 1 regulated activities (CE:AQA779). Registered in Hong Kong under the Companies Ordinance (Chapter 622), No. 1173058.

In Japan: Issued by Columbia Threadneedle Investments Japan Co., Ltd. Financial Instruments Business Operator, The Director-General of Kanto Local Finance Bureau (FIBO) No.3281, and a member of Japan Investment Advisers Association and Type II Financial Instruments Firms Association.

In UK Issued by Threadneedle Asset Management Limited. Registered in England and Wales, Registered No. 573204, Cannon Place, 78 Cannon Street, London EC4N 6AG, United Kingdom. Authorised and regulated in the UK by the Financial Conduct Authority.

In the EEA issued by Threadneedle Management Luxembourg S.A. Registered with the Registre de Commerce et des Societes (Luxembourg), Registered No. B 110242, 44, rue de la Vallée, L-2661 Luxembourg, Grand Duchy of Luxembourg.

In Switzerland issued by Threadneedle Portfolio Services AG, Registered address: Claridenstrasse 41, 8002 Zurich, Switzerland

This document is distributed by Columbia Threadneedle Investments (ME) Limited, which is regulated by the Dubai Financial Services Authority (DFSA). For Distributors: This document is intended to provide distributors’ with information about Group products and services and is not for further distribution. For Institutional Clients: The information in this document is not intended as financial advice and is only intended for persons with appropriate investment knowledge and who meet the regulatory criteria to be classified as a Professional Client or Market Counterparties and no other Person should act upon it.

 

Columbia Threadneedle Investments is the global brand name of the Columbia and Threadneedle group of companies.

Related Blog Posts

29 February 2024

Unknown pleasures: A new era for equity investors #3

Portfolio positioning
28 February 2024

Unknown pleasures: A new era for equity investors #2

The shape of the new economy – from inflation and growth to government debt and equity valuations.
27 February 2024

Unknown pleasures: A new era for equity investors #1

How we got where we are.

You may also like

Investment approach

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.

Funds and Prices

Columbia Threadneedle Investments has a comprehensive range of investment funds catering for a broad range of objectives.

Investment Capabilities

Teamwork defines us and is fundamental to our investment approach, which is structured to facilitate the generation, assessment and implementation of good, strong investment ideas for our portfolios.