On December 6, the author published the following article on the FT Chinese website "Japan's economic inflection point has appeared, and the yen appreciation is in sight", and the yen rose sharply in the following days, from about 151 to the current 142 in the past month. Japan's banking sector has also undergone a seismic shift recently: the three major banks, Mitsubishi UFJ, Sumitomo Mitsui and Mizuho, have raised their 10-year fixed deposit rates from zero for many years to 02%。In 2024, the Bank of Japan will exit negative interest rates and take the first step towards normalizing monetary policy. Next year, the Bank of Japan's interest rate hike and the Fed's interest rate cut will continue to be positive for the yen's appreciation, and it is very likely that the yen will rise to a level of around 135.
First published on FT Chinese (December 6).**Please indicate the source
In the early 90s of the 20th century, with the collapse of the bubble economy, the Japanese economy fell into a 30-year period of low economic growth, housing prices** and deflation. Recently, there have been growing signs that the Japanese economy is emerging from the shadow of deflation, with inflation now above 3% and economic growth accelerating.
In October, I attended a forum in Hong Kong, at which former BOJ Governor Kuroda excitedly proposed that "the Japanese economy is back". At the end of November, I attended a seminar on Japanese economy held in Karuizawa, which was attended by a number of senior executives from international financial institutions and Japanese macroeconomic policymakers. During the discussion, the author felt that the Japanese economy is likely to start in 2022**, and this year's employment, prices, assets**, and foreign capital inflows will continue to improve, driven by the combination of aggressive and loose monetary policy, coordinated fiscal policy, and the restructuring of the global industrial chain. The Japanese economy has a chance to emerge from the "lost thirty years". On the basis of the previous three-arrow policy of economics, the economy has seen a historic turning point and the shadow of deflation. At the same time, the Bank of Japan's monetary policy is also facing a turning point, and the yen is now on the path of appreciation.
In 2023, the Japanese economy has recovered significantly
After being elected prime minister of Japan for the second time in 2012, he launched the "economy" represented by the "three arrows" in an attempt to pull the Japanese economy out of a long-term recession. The first arrow is large-scale monetary easing through the Bank of Japan, which aims to push up inflation, depreciate the yen, improve competitiveness, and encourage corporate investment and consumer consumptionThe second arrow is a flexible fiscal policy, which will boost aggregate demand with infrastructure investment, stimulate investment enthusiasm with corporate tax cuts, and raise consumption tax to fill the fiscal expenditure gapThe third arrow is structural reforms, which aim to overcome structural obstacles to Japan's economic recovery, including labor shortages, credit shortages for small and medium-sized enterprises, and declining agricultural competitiveness. These policies have boosted the Japanese economy to a certain extent, but they still have not come out of the shadow of deflation.
With the support of more active monetary and fiscal policies after the epidemic, especially under the restructuring of the global industrial chain, the Japanese economy has been significantly improved since 2022, and the economic growth rate has entered a positive cycle. To this end, in October 2023, the IMF sharply raised its forecast for the growth of the Japanese economy in 2023 to 2.20%, the highest since 2010.
Since the beginning of this year, Japan's economic growth rate has been remarkable**. From 1991 to 2021, Japan's average real GDP growth rate was 09% or so, with a number of years of negative growth. However, in the first three quarters of 2023, Japan's real GDP was 17%, of which the depreciation of the yen under the depreciation of goods, inbound tourism increased sharply, net exports to GDP growth as high as 07 percentage points, the growth rate of Japan's automobile exports in the first three quarters was as high as 158%；The number of foreign tourists in October has already surpassed the number of the same period in 2019. I personally feel that even in US dollars, the number of high-end hotels in Tokyo has more than doubled compared to 2019.
The job market demand is strong. From 1991 to 2021, Japan's effective job seeker ratio (the number of effective job seekers for effective job openings) was 09 or so, and the average unemployment rate is close to 4%. However, as of September 2023, Japan's effective job seeker multiple has risen to 13, and the unemployment rate is the lowest in nearly a decade (26 ), this is also achieved in the context of Japan's active relaxation of immigration policy.
Inflation continues to be above 3%. From 1990 to 2021, Japan's average CPI growth rate was only 01%。However, as of October 2023, the CPI has been above 3% for 15 consecutive months, of which the core CPI has remained above 4% for seven consecutive months. In the spring 2023 labor talks, Keidanren called for reviving the Japanese economy by promoting a "virtuous cycle of wages and prices," and the final increase in labor contracts reached 3.9%, the highest level since 1992.
Inflation is quietly influencing consumer behavior. Since the beginning of this year, the year-on-year growth rate of commercial sales in the retail sector has continued to be above 4%, much higher than the average of 064%。During this trip to Japan, it is clear to me that the Japanese consumer market is gradually picking up and consumer confidence is also increasing. For example, restaurants can also have difficulty making reservations, and when passing by Ginza luxury stores, you will see queues at almost every doorstep, some of which are quite long, which has not been seen for many years.
The restructuring of the industrial chain is beneficial to Japan
Since 2019, in order to promote investment in Japan, Japan and local governments have introduced a series of incentive policies to attract foreign investment, including the relaxation of immigration policies, tax incentives for foreign investment, and innovation incentive subsidies. As a result of these policies, Japan's foreign direct investment (BOP) increased to 6.20207 trillion yen, an increase of 53%. Under the impact of the epidemic, it will shrink to 38 trillion, 2022** to 64 trillion.
The author has written in this column "How does the transfer of industrial chain affect China's exports?".mentioned that the investment in European and American countries is accelerating towards "de-Chinaization". For example, the United States and its allies have stepped up efforts to decouple China and science and technologyThe United States and India have signed a series of agreements in semiconductors, high-tech and other fields to strengthen the diversification of the ** chain and reduce dependence on China;The Netherlands restricts the export of some lithography machine models to China, etc. Under the long-term trend of U.S.-led industrial relocation and "friendly shore outsourcing", Japan is seeking opportunities in the restructuring of key industrial chains and increasing the introduction of foreign investment in semiconductors, in order to enhance the resilience of the first chain.
According to Japanese media reports, foreign investment in Japan's semiconductor industry has exceeded $14 billion since 2021. TSMC is currently building two factories in Kumamoto Prefecture, which have received a lot of support from Japan**, Sony Semiconductor, etc., and the first is expected to have a total capital expenditure of about $8.6 billion, and mass production is expected to be achieved in 2024. The second Japan** is considering providing capital expenditure of up to 900 billion yen, and is expected to start producing 5nm chips in 2025. On November 22, Bloomberg revealed that chip foundry leader TSMC is considering creating a third factory in Japan for the production of 3nm chips.
Japan **continues**
The Nikkei 225 index in Tokyo fell by about 80% at the onset of the 2008 financial crisis, and has since slowly climbed, but the gains have been relatively limited. In recent years, due to the long-term depreciation of the yen and the continuous improvement of Japanese corporate performance, coupled with the sharp quantitative easing monetary policy, Japanese assets have begun to **, and the Nikkei 225 index has increased from about 8,000 points in 2011 to about 33,000 points now. As of November, the year's growth rate reached 28%, during which it continued to break through the highest level since March 1990. By comparison, the S&P 500 climbed 19%.
As early as August 2020, Warren Buffett borrowed in yen from five Japanese trading companies, Itochu Corporation, Mitsubishi Corporation, Mitsui & Co., Sumitomo Corporation and Marubeni, each with more than 5% of the shares at the beginning, holding 62 shares$500 million, followed by an additional $10 billion, is Buffett's largest investment outside the United States. After Warren Buffett**, the stock prices of the five major trading companies soared, only from August 2020 to November 2023, the increase was 3-4 times, plus Buffett has continued to increase his holdings in these five companies in recent years, the initial 62The $500 million investment has already multiplied several times. In addition, when Buffett entered the market, the yen exchange rate was around 105, and he did not directly exchange dollars for yen to buy **, but deposited dollars to enjoy high interest rates, used dollars as collateral, and borrowed at an interest rate of 05% of the yen was bought, and now it not only enjoys several times the income on the **, but also avoids the loss of the depreciation of the yen in the exchange rate, and also earns the interest rate differential, showing the level of the "stock god".
In addition, Japan's ** regulators have formulated policies requiring listed companies to pay more attention to corporate profitability and dividends, ** non-core business, etc., and these corporate governance improvements may further attract more international capital into the Japanese ** market.
Housing prices in Tokyo are showing signs of overheating
After the collapse of the bubble economy in the early 90s of the 20th century, Japan's real estate ** continued to decline, and by the outbreak of the financial crisis in 2008, the Japanese housing price index even fell by about 40%. In recent years, however, there has been a resurgence of population returns to urban centres. In the first half of fiscal 2023 (April to September), the average number of newly built apartments in the Tokyo area was 27 percent higher than the same period last year3%。In the first three quarters, the average land transaction in the Tokyo and Osaka metropolitan areas was ***43% and 3%.
In the past, young people in Japan were known for their low desire, "not getting married", and "not buying a house", but recently we have observed that more and more people are actively joining the army of home buyers, and the group of home buyers is showing a trend of getting younger. From "refusing to buy a house" to "re-entering the market", more and more young people are once again looking at real estate as the first choice for value preservation and investment. According to Japan's Household Income and Expenditure Survey, the post-pandemic household ownership rate of households under the age of 29 has reached 33%, the highest level in nearly 20 years. Compared to 2002, this represents an increase of about 14 per cent.
The author examined the property market in central Tokyo and confirmed the myth that high-end housing prices in central Tokyo have doubled in more than a year. A 300-square-meter high-rise apartment in Toranomon, Tokyo, was worth more than $10 million at the start of 2022 and has now soared to about $20 million. Located in Minato-ku, Tokyo, the Toranomon area is one of the bustling commercial districts in central Tokyo with high-rise towers. According to the author's field investigation, the doubling of real estate in the central area in the past two years is relatively common. At present, the most expensive new real estate Azabutai house, the price of a 300-square-meter house is 5.4 billion yen, more than 30 million US dollars, ** is close to the top luxury houses in Hong Kong, but in Tokyo, this ** house has to be reviewed and qualified to be bought after being lucky by lottery. It's no wonder that the president of the world's largest asset manager says he feels Japan could return to the prosperity of the '80s.
Monetary policy is bound to shift, and the yen is expected to usher in an appreciation cycle
In the face of rising economic growth, inflation and household consumption, the current attitude of the Bank of Japan is still cautious, believing that the Japanese economy still needs to improve its growth resilience. At its October meeting, the Bank of Japan maintained -0The benchmark interest rate of 1% and the 10-year Treasury yield target of 0% only remove the hard constraints on the upper and lower limits of YCC (0.).5%), using 1% as the reference upper limit for the 10-year Treasury curve control yield. At the same time, the Bank of Japan also raised its inflation forecast for fiscal 2023 to fiscal 2025, increasing its tolerance for future inflation.
But the lesson of the United States is that a lagged exit from quantitative easing will lead to runaway inflation, which will lead to aggressive tightening that will lead to a sharp appreciation of the dollar. In 2020, the United States adopted unprecedented expansionary fiscal and monetary policies to combat the economic blow of the new crown epidemic, and although it effectively offset the impact of the epidemic and avoided the economy from falling into recession, the Federal Reserve did not exit the large-scale quantitative easing policy in time, resulting in the United States experiencing high inflation rarely seen in 40 years. The 2021 CPI has increased from 1 at the beginning of the year4% rose rapidly, reaching even 91% high. The Fed was forced to raise interest rates 11 times in a row, for a total of 550 basis points, which eventually led to a sharp appreciation of the dollar, especially against the yen.
Based on the above analysis, the author believes that the Bank of Japan is likely to be forced to adjust its monetary policy sharply in 24, and the Fed is likely to start cutting interest rates after the second quarter of next year, and the results of Japan's 2024 spring wage negotiations will also be announced. In 2023, Japanese companies have raised wages by the highest level in 30 years, but they are still criticized for not offsetting the impact of inflation. So next year's wage hike is likely to exceed last year's level, leading to a wage-** spiral, and the Bank of Japan will be forced to exit negative interest rates and raise interest rates more aggressively and at a faster pace.
The author mentioned in "Why the Yen Continues to Depreciate Under the Recovery of the Japanese Economy" that under the influence of the loose monetary policy and the hawkish stance of the Federal Reserve in the past decade, the yen has continued to be under depreciation pressure this year. However, these two factors will change next year, and the Bank of Japan's interest rate hike and the U.S. interest rate cut will form a significant positive for the yen's appreciation, and the possibility of the yen appreciating above 135 is not small.
Review of previous reports:
The global economy in 2023: the year of accelerating divergence.
How does the U.S. dollar affect the global rise and fall?
The global economy and China's countermeasures in the post-pandemic era.
Why does the yen continue to depreciate under the recovery of the Japanese economy?
How does the transfer of the industrial chain affect China's exports?