By the Numbers: A Japanese Growth Check In

Even after strengthening slightly of late, Japan’s yen remains historically weak against the US dollar.^[i] Simultaneously, long-term Japanese Government Bond (JGB) yields are up sharply this year.^[ii] Many commentators we follow see these developments as a set of risks for Japan’s economy. But all year, the country’s stocks have climbed and macroeconomic data have defied negative speculation from economists and analysts we follow.^[iii] Data released last week are no exception, in our view. Whilst we don’t think any are hugely meaningful on their own, taken in concert we think they help show that the weak yen and interest rates’ rise are likely false alarms.

All year, we have seen claims a weak yen drives up import costs—most notably for Japanese energy. In concert with war-driven rising oil prices, this has reignited warnings around resurgent inflation.^[iv] And yes, energy costs are up, with the yen exacerbating the effect in the Land of the Rising Sun. But that alone likely won’t drive headline Japanese consumer price index (CPI) back to 2023 – 2025’s highs.^[v] As Nobel laureate Milton Friedman taught, inflation is a monetary phenomenon: Too much money chasing too few goods and services. Yet last Tuesday, the Bank of Japan published M3 money supply data revealing growth of just 1.2% y/y—below prepandemic rates and near where it has been for three years.^[vi] Given that backdrop (alongside global adaption and substitution), it seems unlikely energy costs will spill into prices more broadly.^[vii] Besides, as we saw in May, war-driven oil price surges usually reverse fast.^[viii] The weak yen-, turbocharged-energy costs in Japan look fleeting and pack limited punch, in our view.

Curiously, we have also seen warnings around higher interest rates in Japan, which conventional economic thinking suggests is a solution to the weak yen. Currencies tend to follow yields, so much of the yen’s weakness is tied to rates there having been lower than in the US, UK and much of continental Europe.^[ix] But today, 10-year rates have climbed 0.95 percentage point year to date—slightly exceeding US Treasury yields’ rise (but to lower levels) as the Bank of Japan (BoJ) unwinds its massive portfolio of long-term JGBs.^[x] The BoJ has also hiked twice in the last 10 months.^[xi] In short, at long last, Japan’s monetary policy committee is normalising policy and reversing forces that artificially depressed rates for years.^[xii] Less downward pressure should aid the yen, although there is still ground to make up versus rates globally. But in sum, we don’t think today’s higher rates spell doom for Japan’s economy and stocks—as data and results this year demonstrate. To us, they seem more like a quiet plus.

Recent data suggest Japan’s economy is still chugging along, defying fears. We think one example came last Monday, when Japan’s Cabinet Office revised its Q2 GDP growth to 1.4% q/q annualised, up slightly from the 1.1% initial reading.^[xiii] Most of this improvement came from private non-residential investment’s improving from -1.2% q/q to -0.9%.^[xiv] It still contracted, but business investment—growth’s swing factor, based on our research—wasn’t as weak as initially thought, which we think is a small positive. Beyond this, rising inventories were a positive contributor—one that is open to interpretation, in our view. It could imply firms are having difficulty clearing shelves. It could be firms anticipating improved demand or stockpiling. Overall, we would call this report quite mixed.

Forward-looking data paint a brighter picture. Take Japanese bank lending’s growing 5.4% y/y in August.^[xv] Whilst this figure slightly missed analysts’ expectations, it still tops Q1’s 4.6% y/y average monthly growth and is in line with Q2’s 5.6%.^[xvi] Notably, the bulk of Japanese lending (within its major and regional banks, around 88% of outstanding loans) saw steady month-over-month growth in August, rising 7.9% y/y and 4.1%, respectively, matching July’s rates.^[xvii] So whilst loan growth has slowed slightly from Q2, it is still nicely positive—pointing to still-healthy credit demand. That said, we see a small caveat: the BoJ hasn’t yet produced borrower data for August, so we don’t know who is taking these loans. Regardless, though, credit tends to fuel investment. And we find investment supports broader growth—reason to cheer and expect a possible uptick in future business investment, in our view. And, with long rates rising more than short this year, Japan’s 10-year minus 3-month yield curve spread has widened from 1.41 percentage points to 1.83.^[xviii] Since banks borrow short term to fund long-term loans, this likely explains the uptick in loan growth and recent widening as long rates’ rise suggests that won’t end soon.

Beyond credit, peek at the Japanese Cabinet Office’s preliminary Leading Index of Business Conditions, which rose to 117.9 in July—its highest level since 2014.^[xix] The gauge has soared since hitting a low of 104.3 in May 2025, rising in every month but June 2026, which was flat. Now, despite its name, we don’t think this gauge is hugely predictive tied to several of its components’ backward-looking nature. We think monthly new job offers, for example, reflect business conditions from months ago as employment decisions tend to follow growth—they don’t lead it. Still, some of the index’s forward-looking and coincident indicators—including final demand goods, new housing construction and consumer construction—were all nicely positive.^[xx] Another positive contributor: Japan’s TOPIX index rising in July, despite all the fearful noise.^[xxi]

That last bit doesn’t surprise us, though. We think it merely extends Japanese stocks’ story this year. Our research finds stocks are the ultimate leading indicator, pricing in the economic, sentiment and political factors most likely to influence corporate profits over the next 3 – 30 months. Thus, their rise—and outpacing global markets—this year isn’t hugely surprising.[xxii] In our eyes, they have just been pricing in Japan’s consistently healthier-than-feared economic reality. Again, the latest data don’t point to robust growth, and we don’t wish to overstate the importance of any of these alone. But in concert, we think they show an economy feared at risk of recession (period of contracting economic output) from high imported energy costs and rising yields is proving resilient. That is about all stocks need, in our view.