Our 2023 forecast for Japan

A global slowdown will likely weigh on Japan’s export sector in 2023, but the on-going post-covid recovery in Japan itself could more than offset the headwinds. Rising household consumption and corporate capital investment are the two pillars of improving domestic demand. We still think the recovery in Japanese household consumption has some way to go, since it is still 6-7% below where it should be according to pre-covid trends in real terms. For its part, corporate investment in Japan now seems to be heading back towards its pre-covid growth trend, with signs that investment is picking up in manufacturing and services alike. A potential surge in foreign visitors could provide additional support. Overall, we expect the Japanese economy to expand at the same moderate rate of 1.5% in 2023 as in 2022.

We expect core inflation in Japan to peak in early 2023 after reaching a multi-decade high and remain sceptical about any wage-driven inflation dynamic proving sustainable. In our view, core inflation will likely push even higher in the rest of 2022 before peaking in early 2023 thanks to lower energy inflation, more favourable base effects and government subsidies (scheduled to start in January 2023).

The Bank of Japan (BoJ) is now the only major developed central bank that is still in ultra-easing mode. Haruhiko Kuroda, the current BoJ governor and the mastermind behind the bank’s monetary easing over the past decade, is set to step down in April 2023. But we believe a monetary policy U-turn is unlikely under a new governor. Extremely high public debt means the central bank will have to be very careful in managing interest rates. The potential easing of inflation in 2023 should also ensure that changes in BoJ policy are minor. We could see some minor tweaks to its existing yield curve control (YCC) framework, such as widening the band within which the 10-year JGB (currently at 25bps around zero) is allowed to fluctuate or moving the anchor point of its YCC from the 10-year to the five-year JGB. But we do not expect any major policy U-turns such as rate hikes or a complete removal of YCC in the foreseeable future.