A transformative period in Japan

Global Economic Context - Japan stands out as a country that has not yet embarked on an interest-rate hiking cycle, with expected resilient economic growth in 2024[1] - Global monetary policy is rolling over, with many developed economies bracing for slower growth prospects in 2024[1] Yen Valuation and Support Factors - The Japanese yen remains undervalued by historical standards, with both cyclical and structural factors supporting its appreciation against the US dollar[3][4] - Narrowing interest-rate and growth differentials between Japan and other countries are expected to support the yen[5][9] - Wage-price dynamics, corporate governance reforms, and reshoring trends are aligning to support a reflationary shift in Japan's economy[4] Inflation and Monetary Policy - Japan's headline CPI, core CPI, and "core core" CPI reached their highest levels since 1981 in 2023, with headline inflation surpassing the US at times[44] - The Bank of Japan (BoJ) is cautious about tightening monetary policy, aiming to ensure sustainable inflation before normalizing rates[8][44] - Real interest rates in Japan remain negative, contributing to the yen's depreciation over the past few years[8] Structural Reforms and Economic Shifts - Abenomics reforms, including wage increases and corporate governance improvements, have laid the groundwork for Japan's reflationary shift[19][30] - The Tokyo Stock Exchange's corporate governance reforms are incentivizing companies to pursue growth, making Japanese investments more attractive[34] Investment and Reshoring Trends - Reshoring trends, driven by geopolitical risks and supply-chain diversification, are expected to boost Japan's capital account inflows and support the yen[35][36] - Japanese investors may repatriate savings from abroad if domestic interest rates rise, further supporting the yen[10][13] Risks and Challenges - Japan's aging population and high debt burden present risks to sustained growth and monetary policy normalization[16][17] - External shocks and a deflationary mindset among the population could hinder Japan's reflationary progress[16]