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Japanese equity markets are on an upward trajectory this year, the Bank of Japan started raising rates for the first time in decades – so, has Japan now finally exited its low-growth era? In a recently published white paper, Insight Investment takes a cautiously optimistic outlook for Japan’s economic trajectory, pointing out that it depends on whether the view is near- or long-term.
For the near-term, the UK-based asset manager emphasises three pivotal factors that could sustain this positive momentum.
Firstly, the asset manager notes that, despite nominal interest rates hovering near zero for over two decades, real interest rates have fluctuated significantly. Periods of deflation kept real rates relatively high until 2012. Even after the Bank of Japan’s implementation of yield-curve control, real rates remained only modestly negative. However, the recent uptick in inflation has led to more negative real rates, which, according to Insight Investment, should support domestic growth over the coming years.
Secondly, the asset manager highlights that corporate Japan has become more profitable. “Although Japanese corporate profits slumped during the pandemic, profitability has been on an upward trend for over a decade and reached new record levels in 2024,” the whitepaper underlines.
Subsequently, more profitable corporates are paying higher wages. Japan’s first prolonged inflation in decades spurred workers to push for higher wages and backed by government encouragement, major corporations responded with significant pay increases. This wage growth extended to smaller, domestically oriented businesses, including the service sector. With inflation stabilising around 2%, real wages have been increasing at over 2%, and surveys indicate this positive trend may continue in the near future.
However, for the long-term outlook for Japan, the asset manager sees huge challenges.
“In the longer term, the challenges facing Japan are significant and likely insurmountable,” the whitepaper states. According to Insight Investments, the country’s biggest challenges are the ageing population and low birth rate, the trend of Japanese corporates to invest overseas instead of domestically, the debt sustainability and the Bank of Japan’s balance sheet.
