In its most recent survey of national eating habits, Japan’s government discovered something unsettling. Adults in this wealthy, healthy country were now eating the smallest daily volume of vegetables since 2001.
The reason? Inflation. At the beginning of March, prices of the three key ingredients of Japanese hotpot, a traditional winter dish — Chinese cabbage, leek and carrots — were respectively 227, 167 and 140 per cent above their long-term average. The Engel coefficient, which measures food as a proportion of household spending, is at a 43-year high.
The collective decision to cut back on greens has come as the country undergoes what some see as its biggest economic inflection in over 30 years: the much-heralded “normalisation” of Japan’s relationship with money after a long period of stagnant prices and moribund growth.
While many other countries have fought to keep inflation down, in Japan its return has been encouraged — at least by the central bank, and specifically in a broad-based form led by consumption and growth. In March 2024, the BoJ ended negative rates for the first time in 17 years, and has twice raised rates since then. The bank has implied that it will gradually push interest rates from 0.5 per cent, their current level, towards an unimaginable 1 per cent.
The aim is to foster a virtuous cycle of rising prices and wages that could spur demand and generate moderate and steady growth. But, despite some positive signs, it has been a bumpy ride. A small increase in interest rates to 0.25 per cent in July caused a record one-day crash in the Tokyo equity market. And the increases are putting unfamiliar pressure on everyone from mortgage holders to chief financial officers, just as shareholders are pushing companies to make huge structural changes.
Even if the broad measure of inflation excluding energy and fresh food shows prices still increasing steadily — 2.5 per cent in January — the acceleration in food costs is stoking a perception that the overall pace is faster. This has introduced fears about whether Japan’s attempt to normalise is actually producing the “wrong” type of inflation.
Although companies are increasing wages at near-historic rates, they are not keeping pace with consumer prices. And consumers, rather than spending more, are feeling the pain and struggling to adjust.
“When you go shopping for food, everything is going to be a bit more expensive,” says Ritsuko Ikeda, who is buying vegetables in Tokyo’s Sangenjaya district. “A couple of years ago, shops and food companies used to apologise when they raised prices, but now they don’t seem sorry: they just go ahead and do it.”
For many Japanese people these new realities are disconcerting, says Naomi Fink, chief global strategist at Nikko Asset Management. “Your experience over years matters. But expectations can be broken suddenly.”
“We are now at the point of shock,” she adds. “Even [with inflation] at 2 per cent, that for Japanese households is a shock.”
Japan’s great inflection is happening under an extraordinary confluence of pressures. Geopolitics have pushed up prices of energy as well as food, both of which Japan imports in abundance. The yen, partly because of the Japanese corporate and institutional tendency to invest abroad, has been weak for an extended period. And the rate of population shrinkage in the country is approaching an average of two people every minute, reordering the way business thinks long term about labour supply and a historic duty to keep unemployment low.
More broadly, the consequences of a Trump-induced global tariff war, potential episodes of severe currency volatility and the threat of economic downturn in the US are adding uncertainty.
So does Japan’s extended brush with inflation really represent economic history in the making? Is it fundamentally positive for the country, or for the households and companies who will decide Japan’s economic fate?
Next week, the Bank of Japan holds its next two-day meeting to decide monetary policy: few expect a rate rise to emerge, but markets, companies and households are watching more keenly than ever.
There has been much talk, by the BoJ and others, that the virtuous cycle is moving as hoped. But as Japan begins a new financial year on April 1 there is a sense of fragility, say former central bankers and private sector economists.
“Yes, the changes are historic. Yes, this could be one of the most significant moments in the history of the Japanese economy,” says Masazumi Wakatabe, a former deputy governor of the BoJ who is now at Waseda University. “Still, I would strongly emphasise the uncertainty.”
Japan’s journey to this moment has been long and tormented. From the mid-1990s, what was then the world’s second-biggest economy after the US was defined by the persistence of price stagnation, an ultra-accommodative monetary policy from the central bank and limited wage growth.
Both companies and households cut costs, hoarded cash and were locked into an assumption that, no matter what the authorities tried, there was no virtuous cycle on the horizon. The 2013 to 2020 Abenomics period, named after its architect, then prime minister Shinzo Abe, applied unprecedented fiscal and monetary stimulus to the deflation challenge, but did not fully resolve the issues.
The Japanese taste for saving made perfect sense when prices were falling because there was no downside to holding cash. Now there clearly is. “Rational decision-making and behaviour can be quite different when in the midst of deflation and when emerging from deflation,” says Nomura Securities macro strategist Tomochika Kitaoka, who argues that the triple impact of price rises, wage rises and rate rises are now affecting “every corner of society, from the most ordinary of citizens to the oldest companies”.
Many analysts like to describe Japan in 2025 as a “high-pressure economy” where wage and price dynamics are reliably spilling into the real economy. By next month, the country will have spent three full years with core consumer price inflation, which excludes fresh food but includes energy, at or above the BoJ’s 2 per cent target.
In January, core inflation reached a 19-month high of 3.2 per cent, in significant part because the average prices of rice have surged to their highest level on record. As a calming measure, this week Japan started auctioning rice from its strategic reserve for the first time ever, though supermarket bosses say they doubt it will have much effect, as it will not prevent stockpiling by wholesalers or force them to lower prices.
At the same time, wages are rising — albeit on a nominal basis, and partly fed by labour shortages that are a consequence of Japan’s shrinking population. Last year, headline pay increases hit multi-decade highs, and the trend is continuing. A survey of over 11,000 companies by the research firm Teikoku Databank found that 62 per cent of Japanese companies say they intend to raise wages from the start of the new fiscal year. On Thursday, the Japan Trade Union Confederation said it would call for pay rises of 6.09 per cent at this year’s Shunto spring wage negotiations — the largest such demand in 32 years.
After years of biding its time, the BoJ remains cautious, particularly because real wages fell 0.2 per cent in 2024. Yet governor Kazuo Ueda seems set to continue normalising. Both financial markets and many economists expect the BoJ to raise rates at least once more this year, with some betting that another 0.25 per cent increase will come as soon as July. An increasing number also believe that rate rises will continue until they hit between 1.25 and 1.5 per cent.
In a client note last week, Barclays chief Japan economist, Naohiko Baba, said that Donald Trump’s recent citing of yen weakness as a justification for imposing tariffs on Japan meant that the Japanese government and BoJ now “arguably have an incentive” to speed up interest rate normalisation.
But it will be a tricky balancing act, says Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities, who expects the next rate rise to come in September. “My only big concern is BoJ communication. If they start to raise rates on a quarterly basis, I don’t think the equity market is prepared for a rush of hikes,” he says.
The impact on Japanese households is of keen concern to everyone, notably the government and central bank — and here again there are complexities, says Fink. “It’s not a one-way deal: they are investors and savers and consumers.”
In preparing for normalisation, Fink adds, the BoJ purposefully positioned itself behind the curve. It allowed two full years for both headline and core inflation to approach its target before taking action, in the hope that households would have time to adjust.
There are some indications that the policy has worked. Although price rises have forced many companies to raise wages, there was a delay during which households were unable to save as much as they did during deflation. And just as people realised they needed greater returns on their savings to survive, asset values — including domestic and US stocks — were rising.
“That helped reintroduce the concept of a time value of money,” says Fink, highlighting not only the loss of purchasing power from holding zero-interest rate savings, but also the opportunity cost of failing to take advantage of positive yields. Online banks are vying to poach customers from traditional banks by plastering adverts for savings accounts with 0.4 per cent everywhere — tiny compared to many other countries, but a huge change for Japanese people.
Meanwhile, the asset management industry is licking its lips at the prospect that at least some of Japan’s roughly $7.4tn stash of cash savings will be funnelled towards mutual funds and other investment products. In January 2024, with superbly judged timing, the Japanese government dramatically expanded the allowable limit of the Nisa tax-protected saving scheme, which is modelled on the UK’s individual savings account (Isa).
Japan’s household asset weightings to equities and investment trusts now stand at 20 per cent, according to BoJ data. Though still distant from the 50 per cent in US and 30 per cent in Europe, this level is roughly double what it was a decade ago. Net purchases of Japanese equities by households and domestic investment trusts since the Nisa expansion have exceeded ¥1tn ($6.8bn), according to Nomura.
But the risks are still considerable, warns Wakatabe. “The BoJ keeps talking about the virtuous cycle, but we are still not there,” he says. “Japanese households are still not spending. Higher prices are making them more thrifty, not making them spend more. There is a chance they will invest in stocks and so on, but younger households are spending on housing and are actually indebted. If rates go up, the burden will be bigger.”
Optimists see signals that Japanese corporate behaviour has finally turned a corner, too. After the Abenomics years, when companies were comfortable with their balance sheets and the corporate sector was a net saver, many companies are now in the process of jettisoning non-core assets such as huge real estate portfolios, businesses that have no real link with their main operations and vanity projects like art galleries. The government is clearly supportive of consolidation, and is not standing in the way of shareholder pressure for reform.
After a spate of mergers, delistings and take-privates, 2024 was the first year that the number of listed companies on the main Tokyo exchange fell slightly — a modest contraction, but one that analysts predict will now unleash a much faster corporate metabolism. Bankruptcies are picking up; zombie companies are now more vulnerable to collapse. There is a genuine possibility, say analysts, that Japan’s squeamishness about creative destruction will become a thing of the past.
“Productivity has been terrible during the monetary expansion period. M&A, bankruptcies have all been neutered. Companies could just tread on, never needing to get more profitable or innovative,” says Martin Schulz, chief economist at Fujitsu. “The main argument for positive interest rates is to keep the market moving and keep it flexible. We need a dynamic economy where new companies come in and squeeze out the ones that don’t have the animal spirits.”
In an attempt to deploy their capital more effectively, companies in the retail, hospitality and manufacturing industries are investing to raise productivity, particularly in long-overdue IT upgrades.
But, tellingly, a lot of their investment is still focused outside Japan. “There is a pessimism about the prospects for the Japanese domestic market. Companies do not see Japan as a growing economy, so all this talk about wage increases doesn’t actually represent a belief,” says Wakatabe. “They have to show some sort of response to the new inflationary environment but they are raising salaries for younger people while paying less for middle-aged employees. They don’t, even now, want to increase the total HR cost.”
Some are sceptical that the inflection point in Japan’s economy will really arrive, or that the exit from deflation will feel like cause for celebration. Takahide Kiuchi, an economist at the Nomura Research Institute, warns that it is premature to declare that Japan had truly normalised.
“Consumption is still very weak,” Kiuchi says, noting that inflation was still predominantly cost-push and that real wage growth was still not high enough to turn households into confident spenders. “And if [the] yen rises significantly, headline inflation will go down and so will inflation expectations.”
Many observers expect that, at next week’s meeting, the BoJ will do as it has done before and paint a picture of an economy that is willing itself back to normality. But for people living through it, the process feels anything but normal. “In nominal terms, it looks like the economy has changed,” says Kiuchi. “In real terms, it has not. We should not be optimistic.”
Data visualisation by Keith Fray
This article has been amended since publication to correct the name of Nomura Research Institute economist Takahide Kiuchi. We apologise for the error