Japan: forging economic resilience amid global headwinds
January 5, 2023
While a global recession may be imminent, the expected tourism boom in Japan could offset the impact of the trade deficit and provide some marginal support for the yen.
The Bank of Japan’s (BOJ) recent policy tweak is added proof that the world faces permanently higher funding costs. Macro fundamentals will determine if it is the start of the BOJ’s policy normalisation or ongoing technical tweaks.
Significant opportunities exist for Japanese companies that could benefit from long-term trends like digital transformation, green transformation and defence build-up.
The full reopening of Japanese borders has been a boon to businesses as the country comes to terms with the hard reality of co-existing with COVID. But with the world grappling with slowing growth and pressing concerns like geopolitical shifts, the journey back to pre-COVID days may prove to be a long ride.
In this interview, Capital Group’s economist Anne Vandenabeele shares her view on the outlook for Japan, the potential benefits from the reordering of supply chains, and where she sees opportunities in the years ahead.
What is your outlook for Japan amid the potential global economic slowdown?
It may be difficult for export-dependent Japan to avoid a recession should a significant global slowdown materialise. The combination of economic weakness in China, persistent global inflation, and interest rate hikes in the US and Europe could result in a drag on real activity (non-financial activity) in Japan.
A key positive is the reopening of its borders to foreign travellers back in October 2022. This alone, based on my estimates, has the potential to add 0.5 percentage points to real gross domestic product (GDP) growth, and up to 0.8 percentage points once quarantine-free travel is allowed for Chinese visitors. At its peak in 2019, the travel and tourism sector added US$359 billion to Japan’s GDP; that year, foreign visitors to Japan rose to a record 31.9 million.1
But high energy costs and slowing economic activity could impede global travel demand. Still, the expected boost from tourism could offset the impact of the trade deficit and render some marginal support for the yen.
Major shifts are underway in global supply chains. Can Japan benefit from this trend?
Japanese businesses and policymakers have been working to enhance the resilience of supply chains and secure their economic lifelines amid a rise in geopolitical uncertainty. The passage of the Economic Security Promotion Act gives the government more oversight of companies that rely on foreign suppliers for critical input and services. I believe this could be a milestone that kicks off a significant restructuring of supply chains in the coming years.
Japan will likely be a beneficiary of friend-shoring (a shift in manufacturing towards allies), especially for labour-light and automated processes such as precision manufacturing. The country’s leading position in automation technology could strengthen should the supply of these technologies to the US, Europe and its other Quad2 allies increase over time.
Global supply chain pressures have eased but remain above historical average levels
Global Supply Chain Pressure Index
Federal Reserve Bank of New York, Global Supply Chain Pressure Index, https://www.newyorkfed.org/research/gscpi.html. Based on standard deviations from average value (data from 31 January 1998 to 30 November 2022). Sources: US Bureau of Labor Statistics, Harper Petersen Holding, Baltic Exchange, IHS Markit, Institute for Supply Management, Haver Analytics, Refinitiv, index authors’ calculations (Gianluca Benigno, Julian Di Giovanni, Jan Groen, and Adam Noble).
1. Sources: Japan Tourism Agency, Japan External Trade Organization.
2. Quad, also known as the Quadrilateral Security Dialogue, is a diplomatic network comprising Australia, India, Japan and the US.
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This material is not intended to provide investment advice or be considered a personal recommendation.
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Anne Vandenabeele is an economist at Capital Group, covering the US and Japan. She has 21 years of investment industry experience, all with Capital Group. Anne began her career at Capital as a participant in The Associates Program, a two-year series of work assignments in various areas of the organisation. She holds a master’s degree with honours in economics from the University of Edinburgh and a master of philosophy in economics from the University of Oxford. She is also a member of the National Association for Business Economics. Anne is based in Washington, D.C.
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