Japan: Entering a New Economic Era

Japan enters the year amid a busy political calendar. The dissolution of the lower house on January 23 has set the stage for early legislative elections on February 8. Economic issues – particularly inflation – feature prominently in the campaign. Although headline inflation stands at a moderate 2.1% over the 12 months to December, some essential goods, including rice, are still rising by more than 30%.

The current political uncertainty should be temporary, but Japanese markets are pricing in the scenario of sustained high inflation. Long‑term sovereign yields have climbed back to levels unseen in decades, with the 30‑year yield around 3.65%. The yen remains very weak, having depreciated from roughly 100 JPY per USD before the pandemic to about 150 JPY per USD today. Equity markets, meanwhile, continue to perform strongly, supported by robust corporate earnings.

Our analysis

We see the rise in interest rates in recent years as a normalization, with Japanese yields moving closer to levels seen in Western markets. With inflation having remained above 2% for nearly four years and public debt now exceeding 230% of GDP, Japan’s shift into a new interest‑rate environment appears broadly aligned with underlying macroeconomic conditions. It is also worth noting that demand for Japanese government bonds remains strong, particularly among domestic investors.

Finally, on the equity side, the efforts made in recent years by many Japanese companies to improve their profitability are bearing fruit: market consensus points to earnings‑per‑share growth of around 10% in 2026, supported by the broader shift away from years of very low inflation.