Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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Japan’s ‘lucky 7%’ GDP growth rate forces BoJ to abandon yield curve control
Charu Chanana
Chief Investment Strategist
Summary: Japan was an economic powerhouse for many years before the bubble burst in 1991 and a long period of stagnation began. Corporate profits and wages were depressed, and an aging society meant labour supply shortages and a drag on consumption. But a new bottom is found as deflation ends and wages and private capex pick up, bringing productivity gains and fast-paced economic growth.
The deflation era in Japan has ended, bringing wage growth back. Spring wage negotiations in 2023 resulted in a 3.6% rise in salaries, and 2024 could see an over 4% gain. Fiscal push from the proposed consumption tax rate cuts will prompt the Japanese consumer to move away from their savings mindset. As the current presidential term ends in September 2024, PM Kishida and his administration bring a host of populist policies that will bolster domestic demand further.
As demand growth is sustained, businesses announce capex increases. Abundant cash reserves of Japanese firms suggest a strong capex appetite, and this has also been reflected in BoJ’s Tankan survey for September which noted an expected 13.3% increase in capex in FY23 from 7.4% increase in FY22. Labor dynamics are also shifting, with labour supply waning due to the aging population, while demand continues to increase in healthcare and social welfare, and due to the increasing domestic demand. This feeds back into the wage pressures, creating a virtuous cycle.
Japan steps up its economic transformation agenda by adopting a framework for technology diffusion which helps boost productivity despite the labour shortages. Global supply chains remain in a flux, but that is a tailwind for Japan due to the increasing trend of friend-shoring, resulting in increased investments. More technology companies announce investments in Japan in 2024 amid government support. Technology cost savings allow Japanese government to deal with its debt and continue the fiscal easing to provide a sustained boost to growth, inflation and wages.
With a yield curve control policy in place, the Japanese economy is over-stimulated as real rates decline with nominal yields capped but inflation expectations rising. The BoJ is therefore forced to end its yield curve control policy in 2024. This causes a rout in global bond markets, as Japanese investors move money back home.
Market impact: Yen strengthens as Japanese investors repatriate money to domestic assets, pushing USDJPY below 130, EURJPY below 140 and AUDJPY below 88.
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