• Prime Minister Fumio Kishida’s approval rating fell to a record low in the first half of 2024 due to a political funding scandal that involved kickbacks made to many prominent members of the leading party.
  • Kishida has vowed to advance legislative reforms that would bring more transparency to political funding; however, it is unclear how this alone would boost his popularity.
  • Japan’s Nikkei 225 stock market index has continued edging higher following a 25 percent surge in 2023, with year-to-date performance up more than 10 percent.
  • Wages are expected to increase 5 percent in 2024 — the biggest hike in 33 years.
  • The Bank of Japan ended the world’s last negative interest rate policy in March, raising its short-term interest rate from the previous -0.1 percent to a range of 0-0.1 percent.
  • The Bank of Japan’s monetary policy meetings will take place June 13-14, July 30-31, September 19-20, October 30-31 and December 18-19. Further interest rate changes may be announced at those times.
  • The Kishida administration plans to introduce a broad income tax reduction in June, with the aim of supporting domestic consumption in the summer.
  • The Tokyo gubernatorial election campaign begins June 20. Voters will go to the polls July 7.
  • Kishida may attend a trilateral summit in July with U.S. President Joe Biden and Korean President Yoon Suk-yeol. The engagement would take place on the sidelines of the North Atlantic Treaty Organization summit in Washington, D.C.
  • Kishida’s tenure as the Liberal Democratic Party’s (LDP) president will end in September. The party leadership election will need to take place before this, opening the possibility for a change of prime minister.

Japan Market Overview and Forecast

Political Climate

General Election and LDP’s Possible Blessing in Disguise

The Kishida Cabinet’s drop in support this year was mainly attributable to a political funding scandal within the ruling LDP. In an effort at damage control, Kishida has committed to implement legislative reforms th­­is Diet session, now scheduled to end June 23, that are aimed at improving political funding transparency. The ruling coalition is expected to enact the reform in some form because it holds a majority in the upper and lower houses of the Diet. However, this alone is unlikely to boost support to the Kishida Cabinet significantly; political funding reform requires compromise among LDP members, and criticism from opposition parties and the media is inevitable. If Kishida decides to dissolve the lower house before the summer, with the Cabinet’s support rate hovering around 20 percent, the LDP will face a difficult election battle.

The LDP will hold its presidential election by September, in which it will choose a candidate capable of leading the party to victory in the next general election. Kishida may run for reelection, emboldened by his performance over the past three years. However, considering the prime minister’s current level of support, only a limited number of LDP members may be willing to contest in the general election under his leadership. A new party president could be elected in that case after receiving a nomination for prime minister in the autumn extraordinary Diet session, which would be followed by the lower house’s dissolution.

Should this scenario unfold, the LDP will likely hold onto power after the general election. New Cabinets typically enjoy a high level of support after they are introduced, providing the LDP with an electoral advantage.

The upper house poll is scheduled for July 2025. If a new Cabinet maintains public support and secures a victory in the upper house election, a three-year period without national elections will ensue, contributing to overall political stability and ensuring the next Cabinet’s longevity.

Macroeconomic Climate

Moderate Growth Key To Establishing Virtuous Cycle of Wages, Prices and Investment

The economy is following a gentle recovery trend, with sustained improvements in household income. Fiscal policy effects will likely continue to contribute to growth throughout the latter half of the year. The International Monetary Fund and Organization for Economic Cooperation and Development forecast slower growth of 0.9 percent compared to 2023, significantly lagging behind the United States but slightly exceeding growth in the United Kingdom, Germany and France.

Wage increases are expected to surpass 5 percent — including regular salary increments — continuing last year’s trend and reaching their highest level in more than 30 years. This is backed by a robust corporate performance. The significant depreciation of the yen and the revitalization of domestic consumption have acted as tailwinds, leading to increased profits across a wide range of industries, including railways, air transportation and machinery. To stabilize the virtuous cycle of wages and prices, the government plans to implement an income tax deduction regardless of annual income starting in June. This would amount to JPY 160,000 ($1,030) for households, excluding those with an annual income above JPY 20 million ($129,000). Officials hope this will increase consumption in the summer.

The Kishida administration hopes to achieve positive real wage growth by maintaining wage increases at 4-5 percent for at least the next three years; however, excessive depreciation of the yen could lead to further inflationary pressure, upsetting these plans. Consequently, the Finance Ministry and the Bank of Japan intervened in the foreign exchange market April 29. Concerns remain about the burden wage pressure and high energy prices would place on companies and households, which could lead to a slowdown in corporate performance growth in the latter half of the year. Ongoing unrest in the Middle East and major fluctuations in financial capital markets will also heighten risk.

The Bank of Japan expects the inflation rate to remain at 2 percent in fiscal years 2025 and 2026. With the risk of deflation considered to have subsided, the focus is now on whether cost increases will be passed on to consumers and whether investment in automation will contribute to sustainable economic growth. Greater emphasis will now be placed on supporting labor mobility to sectors with higher wages and enhancing productivity by developing skills across generations. The Kishida administration’s policy package — to be unveiled in June — is therefore highly anticipated.

Investment Environment

Yen Volatility Likely To Continue

The volatility of the Japanese yen against other major foreign currencies, in which the yen is the weaker of the pair due to the currency’s continued comparative low interest rate against others, will likely continue in the second half of the year. Many speculate that the Bank of Japan will raise its interest rate, but market experts are divided on whether this would happen during the bank’s June policy meeting or at a later stage. A weak yen favors large Japanese companies with a global footprint because it helps exports and increases profits repatriated from overseas, but it hurts domestic consumption due to the rising cost of imported goods being imported. Therefore, currency market intervention will likely continue whenever the currency is weakened excessively, creating volatility.

Asset Management Reform To Benefit the Market

The Financial Service Agency has been busy implementing the government’s “Policy Plan for Promoting Japan as a Leading Asset Management Center,” which aims to stimulate the county’s asset management sector. A core pillar advances reforms that would unlock JPY 2 quadrillion ($12.9 trillion) in personal savings for investment. This could include providing investment tax breaks and benefits to households and nudging listed companies to enhance their corporate governance by improving their low price-to-book ratio. Such initiatives, coupled with the weak yen, have caught the interest of foreign asset managers, which should lead to new investment strategies and a revitalized investment environment in Japan.