Japan is perhaps the most notable outlier during a period of rampant inflation around the world. At a time when war in Europe, supply-chain disruptions, and fiscal and monetary stimulus enacted during the COVID-19 crisis are contributing to a surge in consumer prices in the US and Europe, Japan has experienced a comparatively modest rise in its inflation rate.
With this as the backdrop, investors in Japan show milder concerns about the risks that inflation, interest rates and a recession pose to their portfolios than investors globally. In Japan, the tail risk that investors believe presents the greatest threat is a return to zero interest rate policy (ZIRP), a scenario that could prompt a reversal of the growth-to-value rotation evident in major equity markets during a new era of tighter monetary policy.
Economic trends suggest that a global downturn, should it materialize, could look more like the 1970s, when policymakers mounted a years-long battle against stagflation, than recessions in the proceeding decades. This would suggest a return to ZIRP is less likely even if the global economy falls into recession – so a sudden, dovish shift could present challenges for investors. Today, as central banks raise interest rates to tame inflation, the odds of a prolonged slowdown in Europe appear to be greater than those in the US, given the impact of the Russia-Ukraine conflict and costly investments in new energy infrastructure that will likely be required. In the US, households benefit from strong balance sheets underpinned by higher real estate values, potentially softening the blow from economic headwinds.
Consumer Inflation in Japan
Source: World Bank
Download the report to read more >
1