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
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