Investment Institute
Annual Outlook

Japan – Recovery appears set to continue

  • 13 December 2022 (7 min read)

Key points

  • Japan’s economy looks set to remain robust – we forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, 2023 and 2024 respectively
  • Wage pressures are rising and evidence of firms passing on cost increases are growing
  • We expect the BoJ to remain on hold in 2023, but positive shifts in pricing norms could see yield curve control adjusted in 2024
  • The next BoJ Governor expected in April 2023 could signal a shift in approach.

Recovery set to continue

The recovery of the Japanese economy looks set to continue. Growth should be supported by the delayed reopening of the economy from COVID-19 and a recovery in tourism, with the borders of the country now fully open to overseas visitors. The positive growth momentum will be tempered by slowing external demand – we expect recession in Europe and the US and below-trend growth in China in 2023. In 2024 we expect Japan to continue catching up to its pre-pandemic trend (Exhibit 10). We forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, 2023 and 2024 respectively (consensus 1.5%, 1.3% and 1.1%).

Exhibit 10: Growth continues to recover
Source: Refinitiv and AXA IM Research, 25 November 2022

Inflation spike to fade, but price pressures growing

Inflation is set to remain above the Bank of Japan’s (BoJ) target in the near term with a weak yen adding to inflationary pressures. Core Consumer Price Index (CPI) inflation (which excludes only fresh food) is on the rise and likely to peak this quarter. Government intervention is set to cap the increase in inflation in 2023 through additional subsidies on energy. Following this, we expect to see inflation fall in 2024, though companies becoming more willing to pass on price increases to their customers provides some upside risks. We expect CPI inflation to average 2.4% in 2022, 2.1% in 2023 and 1.3% in 2024 (consensus 2.3%, 1.6% and 1.0%). That said, the outlook is for inflation to fall back below the BoJ’s target, with having just risen above target due to extreme external pressure, and far short of elevated inflation across the globe.

Wage dynamics in Japan appear to be improving but do not yet suggest a significant shift in Japan’s pricing norms and spring wage negotiations will be key. Rengo, Japan’s largest Trade Union confederation, confirmed it will request a total pay increase of 5% but final results tend to come in below Rengo’s target – in 2022 Rengo aimed for total pay increase of 4% and achieved 2.2%.

BoJ: The last dove standing

The BoJ continues to emphasise wage growth as a necessary condition to changing its ultra-accommodative policy stance. This has remained the philosophy under Haruhiko Kuroda’s governorship, but things may change following the appointment of a new Governor in April 2023. Deputy Governor Masayoshi Amamiya and ex-Deputy Governor Hiroshi Nakaso are seen as frontrunners. Nakaso is widely seen as more in favour of reducing monetary stimulus and his appointment would raise the risk of a change in policy from Q3 2023 after the spring wage negotiations. We currently still do not expect the 2% inflation target to be achieved in a sustainable manner during our forecast horizon, but we expect the post-Kuroda BoJ to adjust the ultra-accommodative yield curve control (YCC) policy after taking into account recent inflation, shifts in expectations and a gradual rise in wages.

In terms of timing, we believe a decision to change BoJ policy is unlikely before the spring 2023 wage negotiations. But weaker global economic conditions could see the BoJ proceed cautiously and only tweak policy early in the following year when external conditions improve. In addition, we expect the BoJ to wait for clearer evidence that underlying inflationary pressures are growing and to see if core inflation remains above previous levels once the energy shock dissipates. We expect the BoJ to shift the YCC target of around 0% plus or minus 25 basis points (bps) on 10-year Japanese government bond yields to +/-40bps and to make this move in early 2024. Yet this is a finely balanced call and we see risks skewed to the BoJ remaining on hold throughout 2024.

The information has been established on the basis of data, projections, forecasts, anticipations and hypothesis which are subjective. This analysis and conclusions are the expression of an opinion, based on available data at a specific date. Due to the subjective aspect of these analyses, the effective evolution of the economic variables and values of the financial markets could be significantly different for the projections, forecast, anticipations and hypothesis which are communicated in this material.

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