Japan: inflation finally returns
Inflation finally appears to be making a comeback in Japan. Excluding food, it rose to an annual rate of 1.2% in March, a ten-year high, while consumer prices excluding food and energy rose by 0.1% year-on-year, the first positive number since 1998.
The data supports “growing anectodal evidence” that Japan is moving out of deflation and that the trend isn’t just to do with commodities, says Christopher Wood of CLSA. Consumers’ inflation expectations have been trending higher; they now expect inflation of 3.1% in a year’s time. The emergence from deflation is “potentially hugely bullish” for stocks, given the positive implications for companies’ pricing power and hence their margins.
Underlying inflationary pressures look set to grow further as the economy is on track for a sixth successive year of growth at or above its sustainable rate, as Capital Economics points out. It expects a rebound in housing construction to bolster growth this year, helping to offset slowing exports, while wage growth has accelerated of late, boding well for consumption.
Household spending rose by 0.7% in the first quarter as a whole. Sustained inflation depends “on a cycle of rising wages and higher consumer spending”, as the FT notes. Meanwhile, stocks remain extremely cheap, with no less than 60% of firms trading below book value and PEs historically low, according to Tad Fujimura of Sparx Asset management. The market is worth a look.
