Japan and Japanese bonds: 2024 outlook

Japan could see another year of moderate economic expansion in 2024, supported by the government’s fresh fiscal stimulus, a consumer recovery and corporate capex in selected areas. We expect Japanese GDP to grow by 1.1% in 2024 following 1.8% expected in 2023.

While headline growth in 2024 will likely be lower than in 2023, several factors could support the economy continuing to expand at a pace above its potential, estimated at about 0.5% per annum. The first of these is the recently announced fiscal stimulus package, amounting nearly 2% of annual aggregate disposable income in Japan. The second is wage growth, which has picked up pace in recent years and may stay on an upward trend, thus also supporting household consumption. The third is investment in digital technologies, especially in sectors with acute labour shortages. Such investment will likely boost labour productivity and provide another support to growth.

Inflation in Japan will likely continue to decline in 2024 but may turn stickier, in part because of wage growth. Nonetheless, we expect the Bank of Japan to formally exit yield curve control in the second half of 2024. The central bank will also end its negative interest rate policy in 2024 by hiking the policy rate from -0.1% to zero. This will likely happen at the same time as the removal of the YCC, or slightly afterwards.

We expect Japanese investors to continue to withdraw from foreign bond markets as domestic bond yields become more attractive and the cost of hedging currency exposure remains elevated. Along with the removal of the YCC policy, this should contribute to the progressive normalisation of the Japanese government bond (JGB) market by enhancing trading and liquidity. In this new era of normalisation, we would expect the 10-year JGB yield to trade above 1%, with a rate of 1.2% our end-2024 forecast. This means that JGBs are one of the rare segments of the fixed income market where we expect total returns after inflation to be negative in 2024. As such, we maintain our underweight stance on JGBs.