Japan’s growth prospects amid inflation concerns

Japan’s economy finds itself at a crossroads as it grapples with the dual challenges of stimulating growth and managing inflation. Recent data paint a picture of an economy in transition, with policymakers and businesses alike working to navigate these complex waters.

The world’s third-largest economy showed signs of life in the second quarter of 2024, expanding by 0.7% on a quarter-on-quarter seasonally adjusted basis. This growth was primarily driven by a rebound in domestic demand, offering a glimmer of hope for economic recovery.

However, the year-on-year decline of 1.0% underscores the fragility of this progress and the lack of broad-based development across sectors.

Improving domestic demand

Household consumption is expected to recover, buoyed by rising wages that are set to enhance household income. This positive trend in wage growth is a crucial factor in Japan’s economic equation, as it has the potential to spur domestic demand and drive economic activity.

However, the overall growth outlook remains subdued due to increasing living costs and the looming threat of a global economic slowdown that could impact Japan’s export-dependent industries.

Price stability

Inflation continues to be a key concern for policymakers and consumers alike. August saw headline inflation inch up to 2.8% year-on-year, surpassing the Bank of Japan’s (BOJ) 2% target.

As wage growth gains momentum, there is potential for further upward pressure on inflation, particularly in the services sector. The gradual phaseout of government measures aimed at curbing inflation adds another layer of uncertainty to the price stability equation.

The Bank of Japan (BOJ), the country’s central bank, finds itself in a delicate position as it seeks to normalize monetary policy without derailing the fragile economic recovery. In September, the BOJ maintained its policy rate at 0.25%, a decision that aligns with its cautious stance on the economy’s current state.

Market watchers anticipate another modest rate hike of 10 basis points in the fourth quarter of 2024, contingent on continued wage growth and robust consumption trends.

Yen’s trajectory

In the currency markets, the Japanese yen has shown strength, returning to around 140 per US dollar after the massive unwinding of yen carry trades. While the currency may continue to strengthen due to anticipated policy shifts from both the BOJ and the US Federal Reserve, another significant rally is unlikely in the near term.

The country’s ability to foster sustainable growth while managing inflationary pressures will be crucial in determining its economic trajectory in the coming years.

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ANNA DOMINIQUE CUDIA, MBA, CSS, is the Head of Markets Research at Metrobank’s Trust Banking Group, spearheading the generation and presentation of financial markets insights to internal and external clients. She used to be with Metrobank’s Investor Relations, where she brought in international awards and took part in various multi-billion peso and dollar capital raising activities. She holds a Master of Business Administration (Finance) degree, with distinction, from the University of London, and industry certifications in finance. She is a naturally curious person and likes to travel here and abroad.

SOPHIA THERESE “PIA” BONIFACIO is a Markets Research Analyst at Metrobank’s Trust Banking Group, covering local and offshore macroeconomic research. She obtained her Bachelor’s degree in Economics with a Specialization in Financial Economics, cum laude, from the Ateneo de Manila University and is a Certified UITF Sales Person (CUSP). Pia enjoys long road trips and is a self-proclaimed milk tea connoisseur.