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JAPANESE stocks rose to a fresh 15-year high on Friday, continuing a trend that analysts said could signal that the world's third largest economy is reaching escape velocity from deflation despite the fact that the Bank of Japan is having increasing difficulty in reaching its official inflation target.
With evidence mounting that Japanese exports are finally beginning to feel the benefit of yen depreciation and that the business mood is improving in Japan - allowing firms to raise wages and hoist dividend payments - the likelihood of further stock market gains is seen as strong.
This would add to the "wealth effect" caused by rising asset prices and could help spur both consumption and investment in Japan, some analysts said.
The Nikkei 225 stock average rose by 0.4 per cent on Friday to 18,332.30, continuing a series of small but steady improvement this week that have seen the benchmark average regain its highest level since 2000, and move on towards the 20,000 level that some analysts had not expected to see before the end of this year.
One possible cloud on the horizon, according to chief foreign exchange strategist Tohru Sasaki at JP Morgan Chase Bank in Tokyo, is that the yen could strengthen again as Japanese firms repatriate overseas profits next month before the financial year-end; and as Japanese investors slow purchases of foreign stocks.
But as Mr Sasaki also pointed out in a report made available to The Business Times, the sharp drop in the value of yen in recent times has aroused fears in some quarters that it could damage living standards in Japan; and some correction would be welcome.
Japan's government on Friday upgraded its outlook for exports for the first time in a year while leaving its overall assessment unchanged that the economy is experiencing a moderate economic recovery.
The government's monthly economic report followed data on Thursday showing that exports in January rose at their sharpest rate since late 2013. The Bank of Japan also improved its assessment of exports and output on Wednesday.
These trends add support to the claims by Bank of Japan governor Haruhiko Kuroda that the 30 per cent drop in the value of the yen since he became head of the central bank two years ago is proving on balance to be beneficial to the Japanese economy.
The embattled governor is in need of good news as, according to Japanese media, some members of the central bank's Policy Board fear that Mr Kuroda's determined pursuit of a 2 per cent annual consumer price inflation target by "around" fiscal 2015 could have a damaging impact on living costs.
A sharp rise in import prices, as a consequence of yen weakness, has eaten into workers' real (inflation adjusted) incomes, as wage rises in Japan have not kept pace with rising prices, critics charged.
But with exports from Japan to the US and Asia showing a firm trend, and Prime Minister Shinzo Abe's government putting strong pressure on Japanese firms to pass on higher profits in the form of higher wages, capital investment and dividends, incomes and consumption could begin rising soon.
Japanese business sentiment edged up in February, and it is seen improving further, a Reuters poll showed on Thursday, underlining the economy's gradual recovery from a recession although companies remain wary about sluggish demand.
The Reuters Tankan survey of 483 big Japanese companies, of which 270 replied between Feb 2 and Feb 17, closely tracks the Bank of Japan's Tankan survey. The survey indices are the difference between the percentage of companies saying that conditions are improving and that of those saying that conditions are worsening.