The generalised monetary easing cycle with Japanese asynchrony
5 MAR, 2025
By LBP AM
Author: Xavier Chapard, Strategist at LBP AM
Almost all central banks have embarked on a cycle of interest rate cuts. The only exception, in an asynchronous move, is Japan, where an unusual economic dynamic has enabled the central bank to tighten monetary policy.
Marked by significant uncertainty, the macroeconomic environment is characterised by moderate and uneven growth prospects. Sources of instability abound, whether from the protectionist and isolationist measures of the U.S., the conflicts in Ukraine and the Middle East, or the political weaknesses of Europe.
While there has been an improvement in cyclical indicators in developed countries, growth remains uneven. This can be seen geographically, as the U.S. continues to contribute significantly to global growth from a relative perspective, while China and the eurozone have experienced a sharp slowdown in activity. There is also a sectoral disparity, with services supporting growth in 2024, while industry has weighed it down across economic regions.
Convergence of Key Interest Rates to the Downside
This context, combined with the gradual normalisation of inflationary pressures, has led central banks in developed countries to initiate a generalised monetary easing cycle. This cycle is characterised by declining paths in benchmark interest rates. Thus, like the European Central Bank (ECB), the Bank of England (BoE), or the Federal Reserve (Fed), the Australian central bank has just started cutting its interest rates (-25 basis points to 4.1%). Market consensus expects further rate cuts by most major central banks by the end of the year.
Therefore, while the direction is converging, the pace varies. Apart from the current pause by the U.S. Federal Reserve, the BoE is expected to stand out with more moderate cuts than the ECB. The Fed's stance is explained by the fact that core inflation remains well above target and cyclical indicators, especially employment, show considerable dynamism. Similarly, the Bank of England is considering a "gradual and prudent" reduction of its rates, given the resilience of GDP in Q4 2024 (+0.1%[1]) and the strength of the labour market, along with rising wage pressures that remain too strong in the private sector. These developments have made the need to quickly ease monetary conditions in the UK less urgent.
Japan: A New Era?
In a sort of asynchronous move, the Bank of Japan is the only G10 central bank currently tightening monetary policy. The interest rate rise, which has been ongoing for a year, is expected to continue in 2025. The rise in prices—a trend not seen for decades—appears sustainable and has allowed Japan's GDP to surpass the 600 trillion yen targetset by former Prime Minister Shinzo Abe for 2020.
This monetary tightening does not undermine the economic rebound. It accelerated in Q3 and Q4 2024, with annualised growth rates of 1.7% and 2.8%, respectively[2]. This growth is supported by the normalisation of foreign trade, the strength of domestic consumption (boosted by tax cuts), and the revival of business investment.
With its solo journey, the Bank of Japan is highlighting a "small miracle" after four decades of economic stagnation, amid deflationary spirals and structural productivity deficits. Japan is thus on the way to forging new, more prosperous prospects.
