Preview
Certain general global trends in inflation and interest rates have been in evidence since the pandemic. In many countries, including the US, inflation rose (often sharply), triggering an interest-rate hiking cycle. Consequently, real rates rose, and this tightening of central bank monetary policy has resulted in inflation now trending down across a wide range of countries. There is one significant exception to these global trends: Japan. The Bank of Japan (BoJ) has so far steadfastly maintained its policy rate around 0%, even as inflation has continued gradually rising. As a result, real rates have remained negative in Japan, becoming more deeply so as inflation has risen.
There is an argument that this policy might still make sense for Japan at present, given that the country has faced excessively low inflation or deflation for a couple of decades now. Policymakers would want to be confident about the expected future path of inflation before exiting from their long-held accommodative policy stance.
examines a critical issue in this regard: Has Japan exited the low inflation decades?
Executive summary
- Following the bursting of an asset price bubble in the early 1990s, Japan suffered through a period known as the “lost decades.” These were characterized by low inflation or deflation, accompanied by stagnant nominal growth and wages. The legacy of this period remains today, with Japan continuing to follow an ultra-accommodative monetary policy for fear that current (relatively high) inflation is not sustainable.
- Our view, however, is that Japan is in the process of decisively exiting from the stagnation that marked the lost decades. We believe that the policies implemented under “Abenomics” have, since 2013, laid the groundwork for this to happen. Such policies encompassed a combination of expansionary monetary policy, stimulative fiscal policy, and structural reforms (including corporate governance and labor market reforms) intended to place Japan on a higher growth path. Indeed, we believe that the structural changes we are seeing in Japan represent such a decisive break from the past few decades that they might be seen as a positive shock akin to the Meiji Restoration, which ushered in the era of modern Japan.
- The incipient benefits in improving growth and inflation from these policies were, perhaps ironically, given further impetus by the shocks seen in the past few years from the COVID-19 pandemic and the Russia-Ukraine war.
- The supply-chain issues arising from both these factors raised import prices in Japan and further fueled emerging inflationary pressures, which have since been reinforced by some of the strongest wage growth seen in decades. The tight labor market—as well as changes in both wage and price setting behavior—is, in our view, setting the scene for a sustained higher inflation path.
- Meanwhile, the geopolitical ramifications of the past few years’ events have seen Japan being positioned as a beneficiary of the global reshoring trend, in which the relocation of investment into Japan is expected to underpin the improving growth trend from structural reforms. Japan’s geographic location, its position in the Western security alliance and its advantages in areas such as robotics all serve to make Japan an attractive reshoring destination, in our view.
- Consequently, we believe Japan is entering a new decade of sustainable growth and inflation in which a virtuous reflationary cycle is taking hold.
- As always, there are risks to our outlook. These risks could include negative global shocks, headwinds from Japan’s demographic situation and fiscal risks due to Japan’s exceedingly high level of government debt.
Global Macro Shifts is a research-based briefing on global economies featuring the analysis and views of Dr. Michael Hasenstab and senior members of Templeton Global Macro (TGM). Dr. Hasenstab and his team manage Templeton’s global bond strategies, including unconstrained fixed income, currency and global macro. This economics team, trained in some of the leading universities in the world, integrates global macroeconomic analysis with in-depth country research to help identify long-term imbalances that translate to investment opportunities.
Contributors
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. Low-rated, high-yield bonds are subject to greater price volatility, illiquidity and possibility of default.
To the extent a strategy invests in companies in a specific country or region, it may experience greater volatility than a strategy that is more broadly diversified geographically.
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.
This material reflects the analysis and opinions of the authors as of December 01, 2023, and may differ from the opinions of other portfolio managers, investment teams or platforms at Franklin Templeton. It is intended to be of general interest only and should not be construed as individual investment advice or a recommendation or solicitation to buy, sell or hold any security or to adopt any investment strategy. It does not constitute legal or tax advice.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.