Preview
Inflation is generally peaking around the world, leading various countries to either decelerate, pause, or begin reversing rate hikes as the global monetary policy cycle rolls over. Japan, however, is an exception to this trend, having followed a different economic path relative to most other countries for some years now.
In this paper, we have summarized why we believe Japan is entering a new decade of sustainable growth in which a virtuous inflation cycle is taking hold. Looking forward, we see room for the Japanese yen to appreciate against the US dollar as Japanese monetary policy normalizes, the US rate-hiking cycle rolls over, and interest-rate differentials between Japan and the United States narrow. Relative growth differentials and the changing investment environment in Japan will also, we believe, be supportive to the yen.
For an in-depth look at some of the topics covered in this abridged paper, please reference our annual Global Macro Shifts report: “Japan: A New Decade”.
Key takeaways
- As the global monetary policy cycle rolls over and many developed economies brace for slower growth prospects in 2024, Japan stands out as a country which has not yet embarked on an interest-rate hiking cycle, and where economic growth is expected to be relatively resilient.
- Diverse factors including structural reforms, new inflation dynamics and geopolitical considerations have aligned to potentially shift Japan’s trajectory away from the prior decades of stagnant growth.
- These dynamics, in our view, have favorable implications for the Japanese yen, which remains undervalued by historical standards.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Fixed income securities involve interest rate, credit, inflation and reinvestment risks, and possible loss of principal. As interest rates rise, the value of fixed income securities falls.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.