Eco Perspectives

Can Japan assume its singularity much longer?

06/29/2022
PDF

Since early 2022, inflation has been rising, albeit moderately, for the first time since 2014, while growth contracted in Q1. The yen has depreciated sharply due to the Bank of Japan’s very accommodating monetary policy, which is out of step with the other major central banks, who have already begun to tighten their monetary policy. In June 2022, BoJ Governor Haruhiko Kuroda still thought it was “necessary” to maintain a yield curve control policy to boost core inflation to a “stable and sustainable” level. Yet currency depreciation aggravates imported inflation and further erodes household purchasing power. A few weeks before the legislative elections of 25 July, the government is likely to reinforce measures to support household purchasing power.

The Bank of Japan (BoJ) justified the continuation of its policy of yield curve controls, insisting on the “temporary” nature of current inflation. The entire annual increase in the consumer price index (CPI), which rose 2.5% y/y in April 2022, can be attributed to higher prices for energy and food products, that are essentially imported and thus highly exposed to the surge in international commodity prices, which has been amplified by the war in Ukraine. Excluding energy and perishable food items (the BoJ’s core inflation target), the CPI rose only 0.8% y/y in April 2022. This low figure is another reason why BoJ Governor Haruhiko Kuroda argues for maintaining its policy of yield curve controls, which he claims is “necessary” to boost core inflation to a “stable and sustainable” level[1].

GROWTH & INFLATION

The absence of widespread price inflation reflects the sluggish nature of domestic demand, which is why Japan’s cumulative performance has lagged behind that of the other advanced countries since the 2021 recovery. In Q1 2022, real GDP was still 2.5% below the 2019 level, whereas it has already exceeded pre-Covid levels by 3.7% in the United States and 0.5% in the Eurozone. Japanese GDP contracted in Q1 2022 (-0.1% q/q). Notably, there was a decline in the consumption of durable goods (-0.8% q/q) and semi-durable goods (-1.8% q/q), which was hampered by the supply chain problems of businesses, who were also hurt by shortages of components and global supply chain disruptions, especially in China. Consumption of services also contracted (-0.1% q/q) due to health restrictions introduced last winter to curb the expansion of the Omicron variant.

The divergence in monetary policies between the BoJ and the Fed resulted in a sharp depreciation of the yen, which has fallen 22% against the US dollar since the beginning of the year. The deterioration of Japan’s current account surplus is also adding downward pressures on the currency. Higher energy prices have increased the cost of imports, while the shutdown of borders due to health restrictions has reduced external revenues. In Q1 2022, foreign trade made a negative contribution of 0.4 points to Japanese GDP as import growth (+3.3% q/q) largely exceeded the rise in exports (+1.1% q/q).

Support for households

The yen’s depreciation accentuates imported inflation, which is deeply felt by households. In Q1 2022, household purchasing power declined 2.5% q/q[2]. To limit this decline, the government has implemented a series of support measures since the end of April 2022 totalling JPY 6.2 trillion (USD 48.2 bn), including a check of JPY 50,000 (USD 391) per child for low-income households. Since the majority of these measures are debt financed, they will further erode government finances. The OECD is now forecasting a public deficit of 6.9% of GDP in 2022, up from 5.7% in 2021. The Japanese authorities have also renounced their target of generating a primary fiscal surplus by 2025. Yet fiscal revenues will get a boost from the expected rebound in private consumption, following the removal of health restrictions and the reopening of Japan’s borders to tourists. In place since March 2020, the partial lifting of this restriction will allow 20,000 tourists to enter the country daily according to the government, although this is a far cry from the 2019 average of 88,000 tourists (METI).

Looking beyond economic measures, the government also intends to transform its growth model to foster the emergence of a “new capitalism”, one that is more sustainable and equitable in the long term. It aims to better divide up value added between profits and wages. The three “arrows” established by the previous Prime Minister, Shinzo Abe, could give way to redistribution policies that favour households coupled with stricter corporate measures. A more precise road map is expected to be presented following the election of the House of Councillors, Japan’s upper house of parliament, in July 2022, an election that the ruling Liberal Democratic party is once again favoured to win


[1] “The Bank’s Thinking on Monetary Policy: Toward Achieving the Price Stability Target in a Sustainable and Stable Manner”, BOJ speech (6 June 2022)

[2] Households Family Income Survey, Statistics Japan, April 2022.

THE ECONOMISTS WHO PARTICIPATED IN THIS ARTICLE

Other articles from the same publication

Global
Increasing concerns about the growth outlook

Increasing concerns about the growth outlook

The level of activity in the US and the euro area is very high but growth has already slowed down significantly and quarter over quarter growth should remain low for the remainder of the year [...]

Read the article
United States
Accelerated normalisation of monetary policy

Accelerated normalisation of monetary policy

Inflation’s unexpected rebound in May forced the Federal Reserve (Fed) to accelerate the normalisation of its monetary policy. In mid-June, the Federal Open Market Committee (FOMC) decided to raise the fed funds rate by 75 basis points (bp) [...]

Read the article
China
Weakening economic growth outlook

Weakening economic growth outlook

China’s economic activity contracted in April and May 2022 because of stringent mobility restrictions introduced in major industrial regions such as Shanghai. Since late May, restrictions have eased gradually and activity has started to rebound [...]

Read the article
Eurozone
More inflation than growth

More inflation than growth

Until May, Eurozone growth has been relatively resilient to the series of shocks that have swept the region, but its pace should slow more significantly in the months ahead [...]

Read the article
Germany
After imported inflation, domestic inflation?

After imported inflation, domestic inflation?

Germany is one of the Eurozone countries hit hardest by the Russia-Ukraine war, which is leading towards feeble growth prospects and high inflation. German GDP is expected to barely increase by 1.3% in 2022, compared to a Eurozone average of 2.5% [...]

Read the article
France
The shock to purchasing power is smoothed but not fully eliminated

The shock to purchasing power is smoothed but not fully eliminated

The French economy is stuck between three developments with different effects: an inflation shock that is denting consumer spending, a negative supply shock (supply constraints in industry) and the lifting of public health restrictions (benefiting growth as of the second quarter, having held it back in the first quarter). Government measures that have limited inflation were unable to prevent negative growth in the first quarter. However, the positive impact of the lifting of public health restrictions and a rebound in purchasing power should allow for a recovery towards positive growth in the third quarter (+0.3% q/q). [...]

Read the article
Italy
A better recovery in a more complex world

A better recovery in a more complex world

In contrast to the previous recessions, the Italian economy has already recovered what it lost in 2020. The carry over for 2022 is 2.6%. In Q1 2022, real GDP rose by 0.1%, with an annual growth rate above 6% [...]

Read the article
Spain
Significant resilience to shocks

Significant resilience to shocks

After a weaker economic rebound than its European neighbours in 2021, Spain is expected to report solid growth of more than 4% in 2022 [...]

Read the article
Netherlands
Inflation, but not just consumer price inflation

Inflation, but not just consumer price inflation

With an energy mix comprised of nearly 90% fossil fuels, the Netherlands have been hit by the full brunt of the sharp rise in oil and gas prices since the outbreak of the Russia-Ukraine war [...]

Read the article
Belgium
Wait for the rebound

Wait for the rebound

Belgian GDP grew by 0.5% in the first quarter of 2022, as inflation continues to reach new all-time highs. Consumer confidence took a hit at the start of the Russian invasion, with growth subsequently likely to have come to a standstill [...]

Read the article
Greece
Prospects are still encouraging

Prospects are still encouraging

After surging above 10% this spring, inflation will be the main headwind hampering Greek GDP growth in 2022. Yet the economy has proven to be resilient so far [...]

Read the article
United Kingdom
Heading toward recession?

Heading toward recession?

Inflation continues, driven by factors specific to the UK economy. On the one side, we have a labour market with full employment, favouring wage rises [...]

Read the article
Denmark
Industrial sovereignty: from dream to reality

Industrial sovereignty: from dream to reality

Denmark stands out for its vigorous economic recovery, which was much stronger than that  in the other European countries. The Danish economy quickly returned to pre-crisis levels and even exceeded its pre-pandemic growth trend [...]

Read the article
Norway
To address inflation, a coordinated tightening of the policy mix

To address inflation, a coordinated tightening of the policy mix

After being severely hit by the Omicron variant, economic activity picked up again as of February, and the recovery is expected to continue with growth reaching 4% in 2022 [...]

Read the article