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Stocks

Market Scramble: Exit from deflation creates new winners

Investors want price hikes to bring wider profit margins

TOKYO -- Japanese contractors and food producers have shown a knack for turning rising costs and prices into fatter profits, raising investor expectations that deflation is finally in retreat.

The Nikkei Stock Average stumbled early Thursday but regained its footing by midday, eventually edging up 0.36% to close at 19,813. Overall trading was fairly sluggish, with turnover on the Tokyo Stock Exchange's first section clocking in at just 2.22 trillion yen ($19.8 billion). Investors are grappling with uncertainty surrounding a possible U.S. interest rate hike and doubts about the Trump administration's ability to see its policies through, quickly reverting to wait-and-see mode after any major sell-off. 

General contractors shone bright against this gray backdrop. Kajima climbed as much as 1.6% to 848 yen at one point, a roughly 20-year high, while Obayashi and Taisei are hovering near their highest levels in a quarter-century. The rising price of labor, driven by the deepening worker shortage, gives these firms leeway to charge more -- a move that has significantly bolstered earning power, if results for the year ended March are anything to go by.

It helps that contractors are not hurting for business. A redevelopment boom in central Tokyo has property firms clamoring for builders, giving these companies enviable bargaining power. Kajima, Obayashi, Taisei and Shimizu all logged record net profit in fiscal 2016. Most of this group forecast declines in profit this fiscal year. But they have frequently upgraded initial earnings projections in the past, and have plenty of room to do so again. "Continual improvement in profit margins has bolstered these companies' appeal," said Yasuhiko Hirakawa of Sumitomo Mitsui Asset Management.

Go with the flow

An ability to profit from raising prices is alluring even outside the construction industry, demonstrating that companies stand to benefit as Japan at last leaves years of deflation behind. Nippon Express, for example, has managed to pass on rising labor and fuel costs in the form of higher prices without denting its profit margin. The shipper's shares have climbed roughly 18% since the beginning of April. Kirin Holdings and Asahi Group Holdings are hiking beer prices ahead of new restrictions on discount alcohol sales taking effect in June, sending their share prices near record highs. House Foods Group, known for its curries, and dairy Megmilk Snow Brand have also logged sizable gains this fiscal year.

Japan's unemployment rate has fallen below 3%, and domestic corporate goods prices climbed more than 2% on the year in April. Other economic statistics support the assumption that the labor shortage is sparking wage hikes, which are in turn driving up goods and service prices.

Companies still need to prove they can use this process to their advantage if they want to gain favor with investors. Yamato Holdings is a cautionary tale: The shipper's shares climbed as high as 2,569 yen on May 1, the first trading day after Yamato said it would increase door-to-door shipping rates. But those gains had disappeared by Thursday, when the shares closed at 2,398 yen. "Investors can't decide whether rising labor costs or price hikes will have a stronger impact on earnings," said a source at one foreign-affiliated securities firm.

Moreover, keeping prices climbing has proven a formidable challenge in Japan: A consumption tax hike in April 2014 ended a streak of price gains that began the previous spring, for example. Now, while deflation seems to be on the wane, market players "cannot yet be sure" it will not return, said Shigeki Sakaki of Nomura Asset Management -- a skittishness that the current market seems to reflect.

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