Japan is often called the ‘land of the rising sun’ because it meets the sunrise before any other part of the world. But its economy has been stuck in economic darkness for most of the last three decades.
In 2023, the Japanese economy enjoyed a burst of sunshine. Amid a broader global slowdown, Japan has been among the few bright spots.
Consumption bounced back at the start of the year as the economy emerged from pandemic shadows, followed by strong export sector performance in the second quarter of the year. A weakening yen has bolstered exports while pushing imports lower. Japanese corporations have been benefitting from the U.S.-China decoupling.
Japanese inflation has risen to rates not seen in decades, although well below the eye-watering price increases observed in other developed markets. Firms are passing on higher costs to consumers. Wages are finally increasing modestly after years of stagnation. For an economy that has long struggled to defeat deflation, these have been welcome developments.
After a comparatively robust recovery, Japan is likely to muddle through, reverting to its slower norm of growth next year.
Consumption will continue to underpin activity as real incomes improve. Given the weak external backdrop, the outlook for Japanese exports looks less favorable. The weaker yen will aid export competitiveness but won’t be enough to completely offset lower external demand.
The Bank of Japan (BoJ) is the only major central bank with negative policy rates, but that is expected to change. The recent relaxation of long-dated bond yield targeting shows growing appetite to change policy. The outcome of annual spring wage negotiations resulted in a significant base pay rise in 2023. With inflation likely to remain above the central bank target, further acceleration in wages is likely. This developing feedback loop should prompt some monetary policy normalization next year.
A more challenging domestic and global macroeconomic outlook in 2024 could make the BoJ cautious about normalizing policy too quickly, as premature tightening could potentially push Japan into a recession.
Lingering structural issues will prevent the Japanese economy from performing to its full potential. The Japanese population is falling at a rapid rate and labor force productivity is the lowest among advanced economy peers.
Japan’s current growth spurt is unlikely to herald a shift back to the halcyon days of the 1980s. But the threat of economic stagnation and deflation have also abated. There are some clouds on the horizon, but we expect the economic sun in Japan to shine in 2024.
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