Written by Cormac Nevin
In recent weeks, two major Asian economies, Japan and China, have been quietly making the economic and market weather for the rest of the world.
Japan’s government bond market has been at the centre of attention. For years, Japanese interest rates were kept extremely low, with the central bank buying huge amounts of government bonds to stabilise the system. Recently, markets have begun to test whether this long-standing policy can continue. Yields on Japanese government bonds have moved more sharply than usual as investors anticipate that the Bank of Japan may eventually allow rates to rise. This shift matters globally: Japan is one of the world’s largest sources of overseas capital. Higher domestic interest rates on offer can draw money back home, meaning interest rates also rise in other parts of the world and currencies re-adjust, adding volatility to international markets.
China, meanwhile, has been steering global conditions through its balance of trade. New data this morning confirmed that China has exported over $1 trillion more in goods than it imported over the first eleven months of the year. On the surface, that looks like economic strength, but it also tells a story of weak domestic demand. Chinese consumers and businesses remain cautious. Notably, exports to the US have softened, but shipments to Europe, Asia, and emerging markets have risen sharply. This dynamic adds to global supply, helping ease price pressures, but dampens growth for countries reliant on Chinese demand. Unsurprisingly, France’s President Emmanuel Macron has floated the possibility of EU tariffs in response.
China’s Politburo – the top decision-making body of the Chinese Communist Party, made up of senior leaders – has pronounced that stimulating domestic demand, rather than export-oriented growth, is their top priority for 2026. Actions speak louder than words, however. China has been trying to boost domestic demand for some time, but the fundamental reality of the coming century is that China’s working-age population is currently falling and will collapse at an accelerating rate to be down by -25% from the present level come 2050. A structural deficiency of global aggregate demand has the potential to be the ongoing story of the coming decades.
In this environment, a globally diversified portfolio remains the most effective way to capture opportunities. Emerging market bonds and equities may benefit from lower inflation and a softer US dollar; likewise, certain Japanese equities could gain from higher interest rates and a stronger yen. Exposure to assets that thrive under different economic regimes is, in our view, increasingly important as the decades ahead may differ markedly from those recently behind us.
All performance figures are stated in Sterling terms, unless otherwise specified.
Any opinions stated are honestly held but are not guaranteed and should not be relied upon.
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The content of this document is for information only. It is advisable that you discuss your personal financial circumstances with a financial adviser before undertaking any investments.
All the data contained in the communication is believed to be reliable but may be inaccurate or incomplete. Unless otherwise specified all information is produced as of 8th December 2025.
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