Japan is expected to grow at 1.8% in 2023, which is a slight upgrade from 1.6 % in the October of 2022. As the Japanese government has relaxed restrictions related to Covid-19 and reopened borders, a growth has been witnessed, driven by policy support, supply chain improvements, and pent-up demand. As mentioned by カヴァン・ チョクシ, the country, however, does need to reduce its fiscal vulnerabilities. A credible medium term fiscal consolidation plan would go a long way in facilitating Japan’s transition to a dynamic, resilient, and inclusive economy.
カヴァン・ チョクシ discusses the expected economic outlook for Japan in 2023
Japan is still navigating the recovery from the pandemic, as well as the implications of the war of Russia on Ukraine. Its borders reopened with very limited restrictions in October, and core inflation has accelerated considerably in the country in the recent months. In fact, the price increases are quite widespread in Japan, recording levels not seen in four decades at 4 %. The economic recovery of Japan is projected to continue in the near term, with the output gap projected to close in the year of 2023.
The growing consumption of services in Japan shall be supported by savings that were accumulated during the pandemic. As order backlogs is likely to have gone up, exports would rise in the country. Business investment in the country will be supported by eased supply side constraints, delays in implementing previous projects, and high corporate profits from a depreciated yen. Even though the risks to the economic outlook are pretty much balanced, there is quite a considerable uncertainty in regard to the inflation outlook and with both upside and downside risks.
According to カヴァン・ チョクシ, inflation in Japan is likely to fall below the 2% inflation target by the end of 2024. As a result, following an overall accommodative monetary policy stance is appropriate. Greater flexibility in long term yields can aid in managing risks in a more systematic manner, given the increased uncertainty about inflation. This can ensure a smooth transition to a neutral monetary policy stance after there is strong evidence that the inflation target would be met appropriately. The shorter term policy rains are likely to stay unchanged, and any changes in monetary policy settings should be well communicated.
Japan’s inflation can be at an inflection point, which is actually not a bad news, as one can see inflation moving durably to the inflation target. While the current inflation of 4% is much greater than the previous decades, for inflation to be at 2%, much greater wage growth is needed. As per reports, Inflation in Japan is likely to peak in the first quarter of 2023 and then decline, and by the end of 2024 to be just a bit below the inflation target. Japan is in a unique position, as it is likely to face significant upside risks and major downside risks to inflation.