Japanese retail stocks surged over the past year, but investors will need to get more selective ahead as the country's looming consumption tax hike won't hit all retailers equally.
Investors have been holding out hope that Japan will finally succeed at its decades-long struggle against the pressures of deflation on its moribund economy. Abenomics – a series of policy measures unveiled under Prime Minister Shinzo Abe to jump start the economy – has seen some success, but the increase in the consumption tax to 8 percent from 5 percent in April is expected to dent consumer spending, hurting corporate earnings.
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"The consumption tax hike of 3 percentage points is definitely a negative to the retail space," Sho Kawano, managing director at Goldman Sachs Japan told CNBC. "This would create a surge before the consumption tax hike and you'll have a back drop after that" as consumers make big-ticket purchases before the tax increase.
He expects consumption grew around 3 percent in 2013, but forecasts a 0.9 percent decline for fiscal 2014.
The tax hike isn't the only plank of Abenomics with negative implications for retailers. The Bank of Japan's announcement of a massive asset purchase program last year weighed heavily on the Japanese currency.
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"The yen depreciation is positive for exporters (in terms of) having good earnings," Kawano said. "But on the other hand, it is a negative considering the input prices for companies that sell (items) like apparel, home furniture, home fashion (and) the private label companies. That's one of the reasons why consumer pricing is gradually rising right now," he said.
But raising prices to sustain margins isn't an option for every retailer.
"In the high end segment like the department stores, we see that passing on. The demand itself has been very healthy," Kawano said.