Investing.com - Last year, Yaokin Corp., a Japanese food manufacturer, made headlines when it increased the price of its popular Umaibo puffy corn snack for the first time in over four decades. The move sparked outrage among customers who had grown up with the affordable treat. However, this reaction seems to be a thing of the past as consumers now seem more accepting of inflation on everyday products such as instant noodles and soy sauce.
This shift in mindset is one reason behind Tokyo's stock market reaching 33-year highs. Other factors include improved corporate governance and Warren Buffett's endorsement of Japanese stocks. Investors are starting to view inflation – which can lead to higher corporate margins and consumer spending – as evidence that Japan's economy is finally breaking free from years of stagnation.
Consumer price index data shows that prices rose by 4.3% in January compared to a year earlier – their fastest increase since four decades ago. While initially driven by global energy crises rather than robust demand at home, economists predict that these inflationary pressures will persist even after import costs decline.
The Bank of Japan (TYO:8301) has been maintaining its ultra-easy monetary policy while other central banks have tightened theirs, further supporting Tokyo stocks' rise. A majority of economists surveyed expect the BOJ will continue this approach during its upcoming meeting; however, an increasing number believe it may soon achieve its stable 2% inflation target.
Investors hope companies can raise prices without facing too much resistance from consumers under these new conditions. Recent earnings reports revealed positive signs for major steelmaker Nippon Steel Corp., which passed on higher material costs to clients resulting in record sales and profit figures; Chinese restaurant chain Ohsho also experienced strong results despite raising menu prices multiple times.
Inflation is also seen as a potential catalyst for changing consumer behavior, encouraging people to spend and businesses to invest instead of waiting for better deals. This could lead Japan's notoriously frugal households – who hold roughly half their net worth in cash and deposits – to allocate more of their savings towards domestic stocks.
Companies are also expected to put their large cash reserves into action under inflationary conditions. After years of paying down debts and hoarding money during deflationary periods, Japanese firms have accumulated over 320 trillion yen in cash. Now, these companies are increasing dividend payments, conducting share buybacks, and investing in new technologies or infrastructure projects like Panasonic Holdings Corp.'s planned doubling of capital investments this fiscal year.
Despite some skepticism about the sustainability of Japan's economic recovery given past false starts since the 1990s bubble burst, there are signs that this time may be different. For one thing, wage growth has started picking up alongside price increases following recent labor negotiations; high-profile employers such as Uniqlo-operator Fast Retailing Co., Ltd. (TYO:9983), Nintendo Co Ltd (TYO:7974), and Toyota Motor Corp (TYO:7203) have already announced pay raises for workers after being urged by Prime Minister Fumio Kishida as part of his "New Capitalism" initiative.