Global growth continues to drive markets, and Japan is no exception.

“Against all odds, the [Japanese] economy is surprising on the upside,” says CIBC deputy chief economist Benjamin Tal in a weekly economics report. “Against the odds,” he says, because Japan has an aging population.

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However, an influx of foreign workers and women’s increasing labour market participation have aided growth.

Says Tal: “Consensus growth is upgraded on a daily basis, the output gap is basically zero, and potential growth […] was upgraded from 0%-0.5% to 0.5%-1%, while the unemployment rate is now below 3%.”

He expects the momentum will lead to normalizing monetary policy—earlier than priced in to the market.

“The impact […] will be felt not only on yen crosses but also in global bond markets,” he says.

Upside for equities

In a Unigestion report, equities experts Gaël Combes and Maria Musiela also paint a positive picture of Japan: “With a helping hand from Abenomics, the Japanese economy has seen gradual improvements in unemployment, the labour market and GDP growth for some time now. A tighter job market should in time translate to growth in wages and inflation, as well as increased consumption and a further strengthening of the domestic economy.”

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Despite strong momentum for Japanese equities, “valuations are still relatively attractive when compared to other markets, such as the U.S., and are in line with history,” say Combes and Musiela. Further, Japanese equities are no longer underperforming global markets in USD terms—since 2014, in fact.

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Japanese equities also historically benefit from tighter U.S. monetary policy, as is the current situation, says the Unigestion report.

Risks include a potential slowdown in China, geopolitics emanating from North Korea and Japan’s government debt.

For investors, the authors suggest that “a risk-managed strategy that provides growth exposure while managing risk is optimal.”

Read the full reports from CIBC and Unigestion.