In what analysts called a “clear and welcome” sign that Japan’s painful economic battle with deflation may be over, average land prices are rising again after a 16-year hiatus that began with the collapse of the property bubble.

Some areas of Tokyo have experienced meteoric price surges as newly built apartments in the flashiest central districts attract a flood of asset-rich 60-year old retirees in search of the bright lights, shopping and entertainment of the big city.

In some particularly chic parts of the capital, such as Roppongi, Aoyama and the central business district of Chiyoda-ku, both residential and commercial prices soared more than 40 per cent in the course of 2006. Where in previous years average prices had been falling, Tokyo as a whole experienced a 9.4 per cent jump in land prices, while prices in other big metropolitan areas rose by just under 9 per cent.

Economists warned that the trend was probably exacerbating the geographic and economic polarisation of Japan, between rich and poor. Land in rural areas was still dropping in price, despite increasing purchases of “besso” country houses by wealthy urbanites. Rural price declines of an average 2.8 per cent were much smaller than in 2005, but reflected Japan’s shrinking population.

“It may be some years before the regions properly experience the same sort of increases,” said Hiroshi Shiraishi, an economist at Lehman Brothers.

The most significant phenomenon, said property analysts, is the sudden rush of 60 to 65-year-old retirees back into the cities. Having lived their working lives in suburban houses, large enough to raise families, retired couples are snapping-up the expensive luxury apartments being constructed in city centres. Although land prices have been creeping north for two years in the three major cities, Tokyo, Osaka and Nagoya, the Government said yesterday that 2006 was the first year since 1990 when the nationwide average was positive.

Residential land prices in Japan edged 0.1 per cent higher while commercial land increased an average 2.3 per cent. Economists said that the bullish annual land report might be used by the Bank of Japan to justify a rate rise later in the year.

Earlier in the week, Toshiko Fukui, the BoJ Governor, said that land prices would now become an “important factor” in the central bank’s deliberations over interest rate policy. Many economists believe that land prices may be the “missing link” in the monetary transmission mechanism required to kick-start consumer spending and from that the full economic recovery.

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