Without a doubt, the Japanese economy was one of the most hit economies in 2022 and the wake of the Ukraine war. Japan imports over 80% of its Oil consumption, and Yen was one of the weakest currencies in 2022, which means much higher costs for producers. The higher producer price index also increased Japanese inflation to 4% YoY in December.
Broad-Based and gradual improvement.
High inflation is expected to be short-lived, but after years of negative and meager inflation, if we look at that in a bigger picture, it could be good for them in the long term. The Japanese government is planning to raise wages to compete against inflation. Overall wages have stagnated in recent years, and increasing the payments can be accepted. The Japanese Trade Union Confederation is seeking an increase in wages by 5%, including a 3% base pay increase.
After a 4.1% GDP contraction in 2020 due to Covid-19 Pandemic, the Japanese economy raised 2.5% in fiscal 2021. In the last updates, the Japanese government revised its 2022 growth expectation to 1.7% from 2.0%, but still, it is positive. With 1.1% average growth expectations for 2023, we can expect three straight years of growth. One of the reasons for the lower growth expectations for the coming year is the expected weakness in other economies, which reduces foreign demand. Therefore exports will fall. The main GDP driver will be domestic demand, especially Personal consumption, travel, and leisure expenditures.
Although inflation reached 4% in December, the average consumer prices index is supposed to be around 3%. For the year ahead, inflation is expected to slow to an average of 1.73% in fiscal 2023. The most price increase has been driven by raw material costs rather than strong demand. In fact, with higher inflation, demand decreases, which could be one of the main reasons for continuing the accommodative policies and raising wages. Mr. Koruda, in his last speech at the beginning of this year, once again repeated that the economy still needs their support. The Bank of Japan is looking to raise its inflation forecast near the 2% target level for the fiscal years 2023 and 2024 and would start normalization policies if it achieves its 2% sustainable price growth coupled with wage hikes.
Mr. Haruhiko Kuroda will step down in April this year after a 10-year tenure as Governor of the Bank of Japan. Many investors are interested to know the BoJ policies post-Kuroda policy direction. Deputy Governor Masayoshi Amamiya and former Deputy Governor Hiroshi Nakaso are the possible replacement options, and analysts believe in fundamental policy changes and the central bank’s outlook. BoJ recently allowed the 10-year Japanese Government Bond yield to rise to as much as 50 basis points from 25bps to straighten out the distortions in the bond market, and some investors look at that as a first step in a different direction.
In short, this is what the Japanese government expecting fiscal 2023, according to its latest update on December 22:
- FY 2023 GDP estimate +1.5%
- FY 2023 CPI estimate at +1.7%
- FY 2022 GDP estimates +1.7%
In simple words, we expect 2022 nominal GDP to reach 560.2 trillion yen ($4.25 trillion) and 571.9 trillion yen in fiscal 2023, which would be new records for two consecutive years, exceeding the pre-pandemic level seen in 2019.
These words also have other meanings. Japanese Yen, the weakest currency in 2022, could have a bright future in 2023. The economy is increasing, and a return to the previous stability is widely expected. Last year the spread between the BoJ and other central banks, especially Fed’s interest rates, was putting that in a weaker position. Japanese Yen has fallen as much as 32% against the dollar in mid-October. However, hopes for economic growth and less hawkish policies in other economies helped the Yen regain some of its losses, which are expected to continue further with a slow and smooth trend.