M IdeaAsia Economics | Asia PacificThe Viewpoint: Japan's reflation story – What's different this timeSkeptics argue that not much has changed. We see things differently. Macro policies will stay accommodative and engender a decisive shift in wage and price-setting behaviours. Japan will transition to a new phase of moderate, sustained inflation with a return of corporate sector dynamism. Morgan Stanley Asia LimitedChetan AhyaChief Asia Economist Chetan.Ahya@morganstanley.com +852 2239-7812 Morgan Stanley MUFG Securities Co., Ltd.Takeshi YamaguchiChief Japan Economist Takeshi.Yamaguchi@morganstanleymufg.com +81 3 6836-5404 Morgan Stanley Asia LimitedDerrick Y KamAsia Economist Derrick.Kam@morganstanley.com +65 6834-8272 Morgan Stanley MUFG Securities Co., Ltd.Masayuki InuiEconomist Masayuki.Inui@morganstanleymufg.com +81 3 6836-5407 Morgan Stanley Asia LimitedJonathan CheungEconomist Jonathan.Cheung@morganstanley.com +852 2848-5652 Exhibit 1:What's changed in JapanFactorDescriptionExternal backdrop• Post pandemic global environment has been inflationary, rather than the lowflation environment post GFC • Other DM central banks have lifted policy rates to multiple-year highs and over the forecast horizon, we don’t expect other key DM central banks to be back at zero rates and/or take up quantitative easing • BoJ policy has remained accommodative. US and Japan rate differentials have widened and currency depreciation has helped reflation via imported inflation Japan's core inflation, GDP deflator and nominal GDP growth • All are at over 30-year highs Domestic policy setup• BOJ is not risking pre-emptive tightening • Therefore, the r-g gap is at an ideal and conducive level for the first time since the 1990 asset bubble deflation Price and wage setting behaviour of the corporate sector and labour market• Shifting away from past status quo of no price hikes and no wage hikes • Workers are demanding higher pay and corporates appear to be more willing to hike wages • Wage growth is at a 26-yr high Corporate sector's focus on restructuring to improve returns• Corporate governance related reforms are driving balance sheet restructuring and beginning to revive dynamism in the corporate sectorSource: Morgan Stanley ResearchFor important disclosures, refer to the Disclosure Section, located at the end of this report.Key TakeawaysJapan has experienced a round of reflation, with the combination of accommodative policies and a global reflationary environment. We are seeing signs that this reflation will be sustained, with shifts in corporate and household behaviours. We remain constructive on the outlook for Japan. We think nominal GDP growth will hold up at robust levels, and will be stronger than it was during 2013-19. This backdrop will revitalise the dynamism of the corporate sector and the labour market. However, the transition to a new equilibrium is not yet c...
