Japan Officially Enters Inflation Era! Experts Predict Yen at 155–165, One Rate Hike Expected by Year-End — Financial Sector Emerges as Top Winner

Japan's economy has officially emerged from two decades of deflation and entered a new era of inflation. Koichi Konno, co-manager of the Nomura Fund Ireland Series Japanese Strategic Value Fund (JSV), visited Japan to analyze the outlook for monetary policy. He stated that the Bank of Japan (BOJ) will maintain a 'gradual and steady' pace of rate hikes, raising interest rates by 0.25% approximately every six months. The next rate hike is expected between October and December 2024, with subsequent adjustments likely around April 2027.

This pace reflects Japan's determination to fully overcome deflation. During deflation, individuals and corporations preferred holding cash, as its real value increased with falling prices. However, in an inflationary environment, cash holdings erode purchasing power. This shift in mindset is already evident in data: although Japanese corporations historically maintained low borrowing ratios, recent bank lending statistics show significant growth, indicating companies are increasingly leveraging debt for investment and reform.

Regarding the yen's exchange rate, Konno forecasts short-term fluctuations between 155 and 165 per dollar. While Japan's entry into a rate-hiking cycle could support the yen, the pace of narrowing U.S.-Japan interest rate differentials is constrained by U.S. policy shifts. Markets initially expected the U.S. to enter a rate-cutting cycle, but rising oil prices due to geopolitical tensions—such as those in the Middle East—have reignited U.S. inflation pressures, delaying rate cuts and even sparking discussions of further hikes. This has prevented a rapid convergence of interest rate differentials, maintaining downward pressure on the yen.

Nevertheless, Konno emphasized that neither the Japanese nor U.S. governments desire excessive yen depreciation. The U.S. tacit approval of Japan's foreign exchange intervention in May 2024 serves as strong evidence of coordinated efforts to stabilize the currency. He warned that if the yen depreciates too rapidly beyond market expectations, the Bank of Japan might signal a more hawkish stance or even hike rates earlier than scheduled to stabilize the exchange rate—investors should closely monitor such policy risks.

Against this macroeconomic backdrop, Konno revealed that the JSV fund is actively increasing exposure to the financial sector. As the BOJ raises rates, banks' net interest margins (NIM) are expected to expand significantly, boosting profitability. This is the core rationale behind the fund's current overweight positions in bank stocks such as Mitsubishi UFJ Financial Group and Japan Post Bank.