Latest fraudulent alert - last updated on Apr 2023. To find out more information and how to protect yourself, please click here.

Investment Institute
Annual Outlook

Japan Outlook – The Bank of Japan's year

  • 30 November 2023 (5 min read)

Key points

  • Japan is moving endogenously towards a period of slightly higher inflation, stimulated by rising wages
  • Economic growth is likely to slow but it should do well compared to other developed economies and potential growth
  • The Bank of Japan has been cautious but yield curve control is all but ending. We expect gradual rate rises starting from the spring, to reach 0.25% by end-2025

Moving beyond fears of deflation?

Japan’s economy appears to be edging towards a turning point. Helped by the global inflation shock brought on by rising energy costs and a weak yen, pricing dynamics are improving. However, while we think it’s unlikely trend inflation will rise to 2% yet, increasing inflation expectations should shift an economy that has battled with deflation for decades. Wages have long been central to the weak domestic inflationary pressures and are showing sustained signs of rising. In 2023, the Shunto trade union confederation spring wage negotiations delivered the largest pay hike in over 20 years (base pay rose by 2.1%). First indications for the upcoming round indicate this could be even higher, as unions have indicated they are likely to ask for total hikes of at least 5% (of which we estimate 3.5% to be base pay).

We expect inflation to ease somewhat next year due to base effects though improved wage pressures are likely to see inflation settle above previous levels. We forecast inflation to average 3.2% in 2023, 2.2% in 2024 and 1.6% in 2025 (Exhibit 1).

We expect growth to remain strong, supported by another generous government stimulus package and improving real incomes. We believe the ¥37.4tn package (of which ¥14.3tn is a supplementary budget) should boost GDP by 0.8 percentage points (ppt) and forecast GDP growth of 1.9%, 1.2% and 1.0% in 2023, 2024 and 2025 respectively.

The Bank of Japan (BoJ) has successively loosened its control on 10-year government bond yields (YCC), now seeing the policy’s 1% cap as a soft reference, effectively gutting its policy. We expect the YCC’s formal end to be accompanied by an initial step towards rate policy normalisation with the overnight call rate likely to be hiked by 10 basis points (bp) to 0.0% – ending eight years of negative interest rate policy (NIRP). This is likely around April 2024 in our base case – once the BoJ has better sight of 2024’s spring wages outcome. It should remain prudent, hiking by small steps – 10bps in Q4 and most likely 15bps in the first half of 2025, bringing the policy rate to 0.25% by the end of 2025.

Exhibit 1: Inflation to ease

Road to normalisation fraught with risks

As markets begin to consider what higher rates could look like in Japan, we expect the normalisation path will pose risks for Japan and even the global economy. After years of low interest rates, 60% of Japanese home loans are floating rate. The end of NIRP would not affect the housing market too much if the benchmark short-term prime rate does not change. But if it rises further, payments on existing loans would be affected. While the impact on incomes looks manageable, sentiment and the broader housing market is a risk.

Corporates face a similar issue – firms' funding costs are affected more by short and medium-term interest rates. The impact from an end to NIRP would be felt quickly as higher rates feed through existing floating-rate loans. Again, this should be manageable overall. However, vulnerable corporates and smaller and medium size firms (which includes most of the ‘zombie’ companies) could face another blow. This underscores the high bar for a sustained rate hike cycle by the BoJ.

The government also faces risks from rising rates. Japan’s government debt stands at 263% of GDP – the highest in the G7. The rising cost of servicing its debt is likely to become more burdensome for its already-stretched public finances.

Finally, this expected policy normalisation will also be influenced by the policy cycles in other developed markets. A gradual increase in BoJ rate expectations along with expected easing elsewhere is likely to see yen appreciation, providing headwinds to growth and inflation hitting target.

Download the full Japan Outlook
Download outlook (196.69 KB)


    This website is published by AXA Investment Managers Asia Limited (“AXA IM HK”), an entity licensed by the Securities and Futures Commission of Hong Kong (“SFC”), for general circulation and informational purposes only. It does not constitute investment research or financial analysis relating to transactions in financial instruments, nor does it constitute on the part of AXA Investment Managers or its affiliated companies an offer to buy, sell or enter into any transactions in respect of any investments, products or services, and should not be considered as solicitation or investment, legal, tax or any other advice, a recommendation for an investment strategy or a personalised recommendation to buy or sell securities under any applicable law or regulation. It has been prepared without taking into account the specific personal circumstances, investment objectives, financial situation, investment knowledge or particular needs of any particular person and may be subject to change at any time without notice. Offering may be made only on the basis of the information disclosed in the relevant offering documents. Please consult independent financial or other professional advisers if you are unsure about any information contained herein.

    Due to its simplification, this publication is partial and opinions, estimates and forecasts herein are subjective and subject to change without notice. There is no guarantee such opinions, estimates and forecasts made will come to pass. Actual results of operations and achievements may differ materially. Data, figures, declarations, analysis, predictions and other information in this publication is provided based on our state of knowledge at the time of creation of this publication. Information herein may be obtained from sources believed to be reliable. AXA IM HK has reasonable belief that such information is accurate, complete and up-to-date. To the maximum extent permitted by law, AXA IM HK, its affiliates, directors, officers or employees take no responsibility for the data provided by third party, including the accuracy of such data. This material does not contain sufficient information to support an investment decision. References to companies (if any) are for illustrative purposes only and should not be viewed as investment recommendations or solicitations.

    All investment involves risk, including the loss of capital. The value of investments and the income from them can fluctuate and that past performance is no guarantee of future returns, investors may not get back the amount originally invested. Investors should not make any investment decision based on this material alone. 

    Some of the services listed on this Website may not be available for offer to retail investors.

    This Website has not been reviewed by the SFC. © 2023 AXA Investment Managers. All rights reserved.