The end of negativity?

Japan reached an important milestone this week as its policy interest rate rose from -0.1% to zero. The move, which came earlier than EIU expected, ended an eight-year effort to stimulate the economy through negative interest rates. In the end, however, it is the global supply-chain shocks caused by the pandemic and geopolitical tensions that paved the way for Japan’s exit from this policy. These external pressures have forced companies and retailers to raise prices and end the economy’s deflationary spiral.

Although inflation in Japan is now moderating, at 2.1% it remains strong enough to justify tighter monetary policy. Moreover, during the annual shunto wage negotiations, Japan's large companies agreed to meet the unions’ wage demands, implementing increases of 5.28% on average; most workers are seeing their real wages rise for the first time since mid-2023.

Investors’ anticipation of this milestone, which signals the end of deflation and the return of corporate pricing power, combined with financial reforms and attractive valuations, has already driven Japan’s Nikkei stockmarket index to record highs in recent weeks. Business confidence is also rising. The economic gains will be slower to appear, given that expansion is still weighed down by Japan’s ageing population. We expect that economic growth will decelerate to 1.3% in 2024, from 1.9% in 2023, but that export conditions will improve and investment into strategic industries will increase. This is no economic miracle, but it is a turning point.

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