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Japanese equities: The start of a new economic regime?

Junichi Inoue, Head of Japan Equities, discusses the Bank of Japan’s long-awaited rate hike decision and its implications on the economy and stock market.

Junichi Inoue

Junichi Inoue

Head of Japanese Equities | Portfolio Manager

Mar 21, 2024
3 minute read

Key takeaways:

  • Stronger wage growth was one of the main factors supporting the Bank of Japan’s recent decision to end the era of negative interest rates that aimed to support its economy.
  • Investors need to consider the impact of wage increases on personal consumption, income, inflation rates, and interest rate trends, which should lend support to the stock market.
  • Financials and domestic retail stocks could be key beneficiaries from the change in interest rate regime and stronger wage growth, respectively.

This week, the Bank of Japan decided to raise interest rates for the first time in 17 years and also announced the cessation of several quantitative easing measures. The market had been expecting the removal of negative interest rates around the spring of 2024 since the latter half of last year. However, domestic economic indicators have slowed down in recent months, and there was divided opinion on whether a decision would be made by the end of the Japanese fiscal year in March.

A need for sustainable wage growth

However, the rate of wage increases announced by companies and labour unions for the new fiscal year (April 2024- March 2025) last week significantly exceeded expected levels, which is thought to have supported the rate hike discussions at the latest Bank of Japan policy meeting. In last year’s annual spring wage negotiations, in response to inflation, there was a 3.6% wage increase on average, the highest in this century. Yet, this rate was not enough to keep up with inflation, resulting in continued negative real incomes. Because inflation alone does not determine income growth, Japan needed a trigger to enter into a new regime for sustained income growth and to continue a stable, gentle inflation trend. And that happened as a surprise.

With the new fiscal year a week or so away, major companies announced wage increases far exceeding the current inflation rate of about 2% year-on-year, including Subaru at +5.0%, beverage manufacturer Kirin at +7.5%, Hitachi at +5.5%, Insurer Dai-ichi Life at +6.0%, and Nippon Steel at +14.2%. In small and medium-sized enterprises, figures of 4-5% were also seen. From the explanations of corporate management, one can see the desire to correct the ongoing issue of low wages for employees, which has been in stark contrast to the continuous increase in salaries, dividends and executive compensation seen abroad. Despite increasing profits and improved productivity in Japanese companies, real wages for domestic workers have remained flat for over 20 years due to price stagnation. This prompted Prime Minister Fumio Kishida, in the last days of 2023, to ask Japanese firms to raise wages at a faster level than previously. The level of wage adjustment looks likely to be continued over several years. This evidences that the fruits of corporate sector reforms that began 12 years ago are finally reaching incomes.

Are market expectations for further rate rises too conservative?

If we are entering a virtuous cycle, the market’s expectation for a total of 50 basis points interest rate increases, one in the second half of 2024 and another in 2025, could be conservative. Considering the impact of wage increases on the inflation rate, two rate hikes would still maintain a significant real negative interest rate. The market needs to review future personal consumption, income, inflation rates, and interest rate trends, which could have a positive impact on the stock market.

Implications for investors

How does all of this impact our views? We continue to believe that financial stocks are well positioned to outperform as the market continues to underestimate the positive impacts from interest rate regime change. And having seen strong wage growth across a wide range of sectors, we are also increasing our confidence in the domestic retail sector, an anti-consensus view.


There is no guarantee that past trends will continue, or forecasts will be realised.

Equity securities are subject to risks including market risk. Returns will fluctuate in response to issuer, political and economic developments.

Negative interest rates: central bank policy to encourage banks to lend out funds to counter weak economic growth. This means banks have to pay to park their excess cash at the central bank.

Quantitative easing: an unconventional monetary policy used by central banks to stimulate the economy by boosting the amount of overall money in the banking system.

Real interest rate/wages: the interest rate/wages that is received or expected to receive after allowing for inflation.