Nov 27, 2023 Multi Asset

Long View Q3: Japanese reflation

Japanese market has generated renewed confidence among investors with the potential to escape the deflationary trap of the past three decades.

Jason Chen

Jason Chen

Senior Portfolio Strategist
Katrin Loehken

Katrin Loehken

Senior Economist Japan and UK, DWS Macro Research
Dirk Schlüter

Dirk Schlüter

Co-Head, DWS House of Data
  • Return forecasts for the next decade are modestly higher relative to the previous quarter reflecting higher fixed income yields and a modest decrease in equity valuations
  • After multiple decades of tepid growth and inflation, Japan has a number of positive potential catalysts that may help to escape the deflationary trap
  • Structural challenges still remain, where economic reform will depend on sustained positive wage pressures and consumption behavior that can help build a reflationary mindset
  • The decline in Japanese unit labor costs over the past three decades now makes Japan internationally competitive and leaves flexibility for labor unions to negotiate higher nominal and real wages
  • Pressure from Japan’s government and the Tokyo Stock Exchange should continue to shift Japanese corporate behavior toward improved shareholder return and profitability
  • To expand the Long View forecast coverage, we now integrate 10-year forecasts for Private Infrastructure Equity, focused around the EDHEC infra indices


In this report, we present the DWS long-term capital market assumptions for major asset classes as of the end of September 2023 while exploring the risks to these forecasts.

After mostly calm conditions throughout the first half of this year, interest rate volatility re-emerged in Q3, translating into instability across fixed income and equity markets alike. The MSCI ACWI equity index was down 3.4% in Q3, bringing year-to-date returns down to 10%, while the Bloomberg Global Aggregate Bond index returned -1.8% bringing year-to-date returns down to 1.1%.[1]

Bolstered by resilient labor markets amid stronger-than-expected summer hiring, the 10-year US treasury yield sold off from 3.84% at the end of June to 4.57% at the end of September. Market pricing around short-term interest rates also exhibited a more hawkish bias, with Fed Fund futures markets pricing in the overnight rate to remain north of 4.5% through Q3 of next year. This more challenging outlook for cost of capital and discount rates weighted on returns across equity, fixed income, and alternative asset classes, with valuations and starting yields broadly repricing toward more attractive levels.

Where inflationary pressures have proven to be a headwind for consumers and corporations around most of the globe, the Japanese market has generated renewed confidence among investors with the potential to escape the deflationary trap of the past three decades. While valuations in Japan have become modestly more expensive following the year-to-date rally—MSCI Japan is over 25% in local currency terms through the end of Q3, the potential for increased labor competitiveness, economic reform, improved corporate governance and emphasis on shareholder return, and the potential to shift consumption behaviors amid positive inflation trends embeds a level of strategic optimism not seen in decades.

Our 10-year forecasts continue to look increasingly favorable toward fixed-income asset classes that reflect higher starting yield levels that can be partially attributable to inflation risk premia associated with owning nominal return assets. Equities, meanwhile, have strong nominal return potential but remain challenged by elevated valuations.

Our models now forecast an annual local currency  return of 6.8% for the MSCI All Country World Index (“ACWI”) over the next decade, versus 6.6% three months prior as well as an increase for the Global Aggregate Bond Index from 3.4% to 3.9%. At an aggregate level, we estimate the forecasted rate of return on a diversified portfolio at 6.5%,[2] 0.3% higher from the level at the end of Q2.

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1. Source: Bloomberg as of 30 September 2023

2. DWS Calculations for a strategic asset allocation that targets volatility of 10%

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