April 28 (Bloomberg) -- Japan's stocks may benefit from the end of deflation as companies raise prices, improving margins, CLSA Ltd.'s chief strategist Christopher Wood said.

Rising inflation ``is potentially hugely bullish for the Japanese stock market,'' Wood wrote today in his `Greed & Fear' strategy note. The ``bull story in Japan is all about a sustained move out of the nearly 20-year period of deflation with all that means for companies' pricing power and, consequently, their profit margins.''

Consumer prices rose at the fastest pace in a decade in March, suggesting the economy has emerged from a deflationary spiral. Price gains also boosted expectations the Bank of Japan will raise interest rates, allowing banks to charge more for credit.

Wood increased the weighting of banks in his model portfolio of Japanese shares, recommending investors hold 24 percent of their assets in the nation's four largest lenders. Banks comprise 12 percent of Japan's 1,722 member Topix index.

Sumitomo Mitsui Financial Group Inc., Japan's third-biggest publicly traded bank, rose 8.8 percent to 893,000 yen today, set for its biggest gain in six months. A measure of financial companies included in the Topix index climbed 7 percent, more than the 1.9 percent increase in the Topix.

``The new BOJ leadership may just prove more committed to the worthy goal of normalising rates in Japan regardless of the external environment,'' Wood wrote. ``Certainly, ultra low interest rates have long ceased to be a positive factor in Japan.''

Masaaki Shirakawa was appointed Japan's central bank governor earlier this month.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.

Last Updated: April 28, 2008 00:35 EDT