Strong stimulus, slow return to normal

The Japanese economy has been a low performer among peers, with its GDP growing on average by +0.8% over 2000-2019 and +1.2% over 2010-2019. This compares with advanced economies in aggregate on average at +1.9% over 2000-2019 and +2.0% over 2010-2019, and Asia-Pacific in aggregate on average at +4.5% over 2000-2019 and +5.0% over 2010-2019. Japan’s GDP contracted by -4.6% in 2020 (after already contracting by -0.4% in 2019) and recovered by just +1.7% in 2021. Indeed, the Japanese economy entered the Covid-19 crisis on a soft footing, on the verge of a technical recession at the end of 2019. The return to normal has been dragged out, with mobility restrictions related to Covid-19 only being significantly eased in 2022 (given a very slow pace of vaccination compared to other advanced economies). The post-Covid recovery is thus well extending into 2022, with GDP expected to grow by +1.5%. A slowdown in 2023 is on the cards (to +1.1%, with downside risks) in a context of high inflation and slowing external demand. Overall, we expect Japan’s GDP to approach its pre-pandemic (2019) level only in 2023.

Inflationary pressures are scarce in Japan (0.5% on average over 2010-2019), and even in 2022 we are expecting them to reach 2.3%, followed by 1.6% in 2023 – compared to 7.9% in 2022 and 5.3% in 2023 at the global level. In this context, the central bank (Bank of Japan, BoJ) is maintaining its ultra-accommodative stance – against almost all other major central banks in the world that are tightening their monetary policies. Such a divergence is putting pressure on the currency, with the JPY reaching the lowest level since 1990 vs. the USD (as of October 2022). Further depreciation is likely until early 2023, when monetary tightening in the US will peak. In the coming years, and as long as the economic recovery and inflationary trends are not sustainable, the BoJ is likely to keep a negative policy rate, and continue purchasing assets and controlling the yield curve – even though some debates could emerge ahead of the end of current governor Kuroda’s term in April 2023. Fiscal policy had been eased significantly during the height of the Covid-19 crisis and we don’t expect the fiscal deficit to return to pre-pandemic levels in the coming few years. The government will continue to support household income and encourage rising wages and workforce training. On the corporate side, the government will keep incentivizing efforts towards digitalization and innovation (especially when it comes to semiconductors and the green transition).  

External indicators are generally robust. The country is a net foreign creditor, with the largest net international investment position surplus in the world in 2020. The current account balance is in surplus (+3.3% of GDP in 2020) and is forecast to remain so in the coming years. On the currency front, the strong expectations for the US economy (driven by the stimulus) could support a moderate JPY in the near term, though the JPY, being a safe-haven currency, should remain attractive in the longer run.