Japan’s normalization continues, driven by synchronized wage and price increases, improving productivity, and an ongoing monetary policy shift. The country is transitioning into a more conventional economic environment after decades of deflation and ultra-loose policy.
Theme: The “Trio of Hikes” Signals Normalization
- Price Hikes – Third consecutive year of consumer price increases.
- Wage Hikes – Sustained base pay growth expected to exceed 3% annually through 2026.
- Interest Rate Hikes – BOJ exited negative rates in 2024; more hikes forecast through mid-2025.
Result: A virtuous wage-price cycle is forming, reinforcing inflationary momentum and validating the BOJ’s path to policy normalization.
🔮 Economic Outlook: 2025 and Beyond
Macroeconomic Momentum
- Private consumption rebounding from mid-2023 stagnation.
- Capex recovery across SMEs and large firms, particularly in software and productivity-enhancing investments.
- Labor mobility and productivity are improving amid a tight labor market and digital transformation.
BOJ Rate Hikes Path
- Three more rate hikes expected:
- December 2024
- April 2025
- July 2025
- Policy rate expected to reach 1.00% by mid-2025.
Currency Outlook (JPY)
- Yen appreciation expected in 2025, especially against EUR and RMB.
- Supported by:
- Higher domestic interest rates
- Retreat of carry trades
- Lower USD upside under Trump 2.0
- Tourism boom is boosting domestic services prices and wages, creating inflationary support for the yen.
Corporate Outlook: Profits Supported by Pricing Power
Tailwinds
- B2B sectors (e.g. construction, IT, software) benefiting from:
- Price hikes
- Increased volumes
- FX tailwinds boosting export and tourism revenues
- Corporate governance reforms and financial asset diversification are improving capital allocation.
Risks
- US Tariffs under Trump:
- Moderate risk to Japanese exporters, but manageable due to Japan’s 2019 trade deal with the US.
- Japan likely remains a strategic partner to the US and avoids the brunt of protectionism.
- Cost pressures in retail and food sectors could compress margins as input costs rise.
Market Sensitivities
- Japanese equities remain sensitive to:
- US macro data and Fed trajectory
- BOJ surprises, such as unexpected rate hikes
- Despite recent corrections (Apr, Aug, Sep 2024), long-term equity outlook remains positive, supported by:
- Improved earnings visibility
- Strong domestic fundamentals
- Supportive shareholder reforms
Strategic Takeaways
- Japan’s macro landscape is shifting toward normalcy, ending decades of structural deflation and stagnation.
- Policy normalization is gradual but durable—investors and businesses should prepare for structurally higher rates and more responsive wage-price dynamics.
- Corporate Japan is adapting well, especially firms with pricing power and global exposure.
- Currency appreciation is back on the table, making unhedged foreign investments in Japan more attractive.
- Political risks (e.g. US tariffs) bear monitoring, but are not seen as major disruptors to Japan’s macro path in 2025.
