JAPAN

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).  

Japan’s business environment is well-positioned in our assessment of 185 economies, rated in the best range in almost all sub-components. The Heritage Foundation’s ‘Index of Economic Freedom’ survey 2021 assigns Japan rank 23 out of 184 economies (roughly unchanged over the past years), reflecting particularly good scores with regards to property rights, business freedom, monetary freedom, government integrity and trade freedom, and comparatively lower scores with regards to government spending, investment freedom and financial freedom. Meanwhile, the World Bank Institute’s annual ‘Worldwide Governance Indicators’ survey indicates global rankings between 20-23 when it comes to rule of law, control of corruption and regulatory quality. Our proprietary ‘Environmental Sustainability Index’ puts Japan at rank 76 out of 210 economies, reflecting strengths in energy use per GDP, water stress and CO2 emissions per GDP, but weaknesses in terms of the recycling rate and renewable electricity output.

Political stability is likely in the coming few years, with the Liberal Democratic Party (LDP) led by prime minister Kishida Fumio having consolidated its positions after the elections in 2021 and 2022. The LDP, along with its junior coalition partner (Komeito), thus hold ample majority in both chambers of parliament, which should allow for smooth policymaking and reform implementation. Recent public discontent regarding ties between the LDP and a religious group is unlikely to jeopardize the party’s position, given the lack of strong political opposition.