Japan’s stock market is booming. The Nikkei Average has broken through its previous all-time high, surpassing the 63,000 mark on May 13. Since it stood at roughly 50,000 at the beginning of the year, this means it has risen by more than 25% in less than six months. Recently, the international situation has become increasingly turbulent, and as a result, energy prices have soared and a range of other challenges have arisen. Against this backdrop, how should we interpret the remarkable strength of the stock market, which ought to reflect the state of the economy?

Economists and financial experts have offered a variety of explanations for this situation. Some point to expectations that corporate earnings will continue to expand for the foreseeable future, while others cite hopes for aggressive fiscal policy under the Takaichi administration. No doubt these explanations are valid. However, it seems to me that underlying them is something more fundamental: inflation may be running stronger than many people realize, and perhaps it will persist for a long time to come. Investors and business leaders alike should, in my view, be keenly aware of this today.

The other day, when I opened the morning newspaper, I found a real estate flyer tucked inside. Glancing through it, I noticed that it was advertising a unit for sale in the condominium where I live. The asking price was two and a half times what I had paid when I purchased my unit seven years ago. I do not know whether it ultimately sold, but when I asked a real estate agent about it, I was told that the price was roughly in line with the market. In other words, if we index 2019 as 100, real estate in major metropolitan areas would be 250 in 2026. The same can be said of stock prices. At the beginning of 2019, the Nikkei Average was right around 20,000. At the start of 2026, as mentioned above, it had reached about 50,000. Here too, if we set 2019 at 100, then 2026 would equal 250. In other words, asset prices have risen quite sharply over the past several years.

Let us now turn to the Consumer Price Index (CPI). The CPI (all items), released last month and benchmarked to 2020, was reported at 112.7, with 2020 set at 100. For reference, even if we compare this with 2019, the difference is unlikely to be significant, as inflation had not yet emerged as a major factor at the time. Unlike asset prices, the rate of increase in the CPI—for which around 2 percent is considered the target for price stability—appears to have been kept under reasonable control in recent years, for better or worse. However, the outlook remains uncertain in light of factors such as the continued weakness of the yen and soaring energy prices driven by developments in Iran. One indication of this is that the Corporate Goods Price Index (CGPI) rose 4.9% year-on-year in April, marking its fastest growth in three years. Moreover, government measures aimed at containing inflation, such as subsidies for electricity, gas, and gasoline, may soon run out of funding. If that proves to be the case, the prospect of accelerating inflation will become increasingly real. From an investor’s standpoint, it is worth keeping in mind that the day may come when rising prices can no longer be kept in check.

From a manager perspective, however, if wage increases can be secured at a pace that outstrips rising prices, employees can be spared hardship. This is something business leaders must keep firmly in mind as they steer their companies. By providing high-value-added products and services that remain price-competitive, securing healthy gross margins, and continuing to improve productivity, companies must find a way to survive in an era of inflation—or perhaps even stagflation.

For my part, I cannot help but feel that the sharp rise in asset prices in recent years—whether in stocks, real estate, or other assets—is itself a sign that we may be entering an era of full-fledged, long-term inflation. Of course, there is nothing inherently wrong with this if inflation remains within a reasonable range. However, given that stock prices, consumer prices, and exchange rates all have a tendency to overshoot—whether to the upside or the downside, or whether toward optimism or pessimism—we should monitor the situation closely.

Let me conclude by raising another issue. The sharp rise in asset prices that we are witnessing today has positive effects on consumption. At the same time, however, it also works to widen the gap between those who own assets and those who do not. If this situation persists, many people will grow dissatisfied with society, and that dissatisfaction will in turn make society less stable. It would mark the arrival of the kind of deeply unequal society seen in the US. We see every day how populist leaders, drawing support from the frustrations of the majority of their fellow citizens, have emerged and thrown their countries—and the world—into turmoil. That, too, may be cause for concern.

Hirotaka Shimizu
Chairman and CEO
Kamakura Shinsho, Ltd.

Image material：PIXTA