To The Moon

Japan is gradually moving out of deflation, mainly due to external shocks such as Covid-19 and Ukrainian War, rather than the internal "Abenomics." The main reasons why "Abenomics" failed to achieve inflation are the tight fiscal policy and the failure to address labor shortages.

The growth of salaries in Japan in 2024 may once again see a significant increase, and it is expected that Japan's inflation will be around 2.0-2.5% in 2024. In the long run, given the shortage of domestic labor supply in Japan and the changes in the international trade pattern, it is believed that Japan may completely get out of deflation.

Today, the Japanese economy may have emerged from the "Lost 30 Years", and the future may face an important turning point. During 2021-2023, Japan's economy grew above potential GDP for 3 consecutive years, and the nominal GDP growth rate in 2023 was as high as 5.7%, the fastest growth since 1991. $iShares MSCI Japan ETF(EWJ)$

Based on the following three points, the Japanese economy may completely get out of the "Lost 30 years"

1. Gradually moving out of deflation: boosting consumption, improving corporate finances, and accelerating investment;

2. Large space for income growth: per capita wages are the lowest among the G7;

3. High-end manufacturing layout: semiconductor industry.

At the same time, population decline does not constitute an absolute restriction on the Japanese economy.

In addition, in the following aspects:

Consumption: Under the trend of actual wage growth turning from negative to positive, Japan's domestic consumption may continue to recover in the future.

Investment: With improved corporate performance, population decline, digital transformation, and green transformation, Japan's equipment investment may continue to expand in the future.

Exports: In 2023, the largest contribution to the Japanese economy is exports, but there may be uncertainty in future external demand.

Inflation: From cost-push gradually turning to demand-pull, Japan may completely get out of deflation in the future. In recent years, Japan has shown signs of moving out of deflation, which is different from the fact that most of Japan's inflation in 2022 comes from cost-push, and the contribution of demand-pull inflation in Japan in 2023 is gradually increasing.

Inflation Expectations: The long-term inflation expectations of Japanese enterprises and households are at a high level of 3-8%, and the self-realization of inflation expectations may bring continuous inflation pressure. The risk of a sharp rise in Japan's inflation comes from rising commodity prices and the depreciation of the yen, and the risk of Japan returning to deflation comes from the drag of external risks.

Monetary Policy: In 2024, it is highly likely to start normalizing monetary policy, but the impact on the market is limited. During 2023, the Bank of Japan gradually "abolished" the yield curve control policy (YCC), and continued to upgrade its inflation forecast for the future. Within 2024, the Bank of Japan may start to normalize monetary policy, but overall, the adjustment of related policies has limited impact on the financial market.$Japanese Yen - main 2406(JPYmain)$ $Invesco CurrencyShares Japanese Yen Trust(FXY)$

End of Negative Interest Rates: The negative interest rate part of the Bank of Japan's excess reserves is less than 5%, the current overnight rate is close to 0%, the extent of future consecutive interest rate hikes is limited, and the yen has depreciated in the Bank of Japan's interest rate hike cycle in this century.

End of YCC: We believe that in practical terms, YCC ended at the October 23 meeting, and if it turns to a purely quantitative easing policy in the future, the Bank of Japan's bond position may remain flat in 2024.

End of ETF Purchase: In 2022 and 2023, the Bank of Japan has basically stopped buying ETFs. We believe that the end of ETF purchases will have limited impact in the future.

Monetary Policy: There is a risk of interest rate hikes exceeding 50bps when inflation exceeds expectations, and when inflation cannot stabilize at the 2% inflation target, there is a risk that the Bank of Japan will continue to maintain existing monetary easing.