Rhythmic Reasoning_Full Report_Final_EN - Flipbook - Page 34
THE DRUMMER'S EAR | RHYTHMIC REASONING
Despite trade tensions with the U.S., ongoing inflation headwinds,
and monetary policy normalization (which we will get to below),
Japan’s economy has grown for five consecutive quarters. The
median consensus forecast calls for this resilience to continue, with
growth expected to stagnate in 3Q25 before posting a string of
gains in subsequent quarters. For the year, we expect Japan to post
growth of 1.0% this year, before slowing to 0.7% in 2026.
Recent data corroborates the view that consumer spending is
gathering steam, reflecting the positive effects of past shunto
negotiations that saw workers gain significant pay bumps (Fig.
3), enabling inflation to sustainably hit the Bank of Japan’s (BoJ)
long-term target. Business investment, despite the slowdown from
1Q25, also remains positive.
Fig. 4: Concerns around rising fiscal outlays
have driven JGB yields higher in recent months
3.6%
1.8%
3.2%
1.6%
2.8%
1.4%
2.4%
1.2%
2.0%
Jan 2025
1.0%
Mar 2025
May 2025
JGB 30-yr yield - LHS
Fig. 3: Labor cash earnings have turned positive
both on a nominal and inflation-adjusted basis
Jul 2025
Sep 2025
JGB 10-yr yield - RHS
Source: Bloomberg Finance LP, Scotia Wealth Management
In his press conference, Governor Kazuo Ueda said that Japan’s
economy remains resilient as the trade agreement with the U.S.
has reduced uncertainty, while price trends continue to move in line
with the BoJ’s goals. Data for August showed headline CPI rising
by 2.7% year-over-year, down from the prior month due to energy
subsidies. Core CPI (ex. fresh food and energy) on the other hand
remained hot, coming in at 3.3% (Fig. 5).
6%
3%
0%
-3%
Fig. 5: Inflation remains a concern in Japan,
with headline CPI above target since April 2022
-6%
2019
2020
2021
2022
2023
2024
2025
Real cash earnings YoY
6%
Source: Ministry of Health, Labour and Welfare, Japan,
Bloomberg Finance LP, Scotia Wealth Management
4%
Labour cash earnings YoY
2%
Of course, these developments were not enough for Shigeru Ishiba
to stay on as Prime Minister. With the LDP having decisively lost its
majority in both the upper and lower houses, they must now lead
with a minority government and possibly work with other parties
to pass legislation. Opposition parties are keen on implementing
policies that reduce taxes and raise spending, adding to Japan’s
already bloated debt loads and giving the bond market some
pause. These concerns have driven Japanese bond yields higher,
particularly for the 30-year tenor (Fig. 4).
Despite uncertainty around the fiscal policy front, the
aforementioned economic resilience and persistent inflation likely
give the BoJ enough backing to resume rate hikes. Officials opted
to leave the policy rate unchanged at their latest meeting in
September. While the decision to hold was widely expected, the
meeting was not an uneventful affair as two out of nine board
members dissented and favoured a 25 bps hike.
0%
-2%
2021
2022
CPI YoY
2023
2024
Core CPI YoY (ex. fresh food & energy)
2025
Inflation target
Source: Ministry of Internal Affairs and Communications,
Bloomberg Finance LP, Scotia Wealth Management
These price trends, combined with Ueda’s comments and the two
hawkish voices on the board, suggest that the BoJ is inching closer
to resuming rate hikes. We think officials will hike once this year
and next, bringing the policy rate to 1% by 2026-end. The other
significant development from the BoJ’s meeting was their plans
to begin offloading ETFs and J-REITs. While the pace of shedding
these assets is slow and would take over a century to complete,
the key takeaway is the signal it sends: this is another step towards
policy normalization.
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