To continue the second part of the article series “Economic growth forecasts of 2024”, today’s article brings the focus on Japan. As the Japanese economy has been a trending topic since the beginning of 2024, today we delve into the forecasts and policies for economic growth in Japan for 2024.

Japan’s economic recovery has shown moderate progress, albeit with some areas exhibiting weakness. The pace of growth in overseas markets has decelerated, impacting exports which have remained relatively stagnant. While industrial production has maintained a steady trend overall, recent declines can be attributed in part to production and shipment disruptions faced by certain automakers. Despite these challenges, corporate profits have improved, bolstering business sentiment which remains positive. Consequently, business fixed investment has been on a gradual uptick. The employment and income landscape has seen moderate improvement, while private consumption has demonstrated resilience despite factors such as price increases and disruptions in automobile sales. However, housing investment remains relatively weak, and public investment has remained largely unchanged. Financial conditions have remained accommodating.

The year-on-year increase in the consumer price index (excluding fresh food) is forecasted to range between 2.5-3.0 percent for fiscal 2024, tapering to around 2 percent for fiscal 2025 and 2026. While the impact of past import price hikes on consumer prices is expected to diminish, upward pressure on inflation is anticipated through fiscal 2025 due to recent increases in crude oil prices and a reduction in the disinflationary effects of government policies. Additionally, underlying inflation is projected to rise gradually as the output gap improves and long-term inflation expectations increase, fuelled by a reinforcing cycle between wages and prices. By the latter half of the projection period, inflation is expected to align closely with the price stability target. Comparing projections through fiscal 2025 with previous forecasts, lower real GDP growth rates for fiscal 2023 and 2024 are attributed mainly to reduced private consumption, while the outlook for fiscal 2025 remains largely unchanged. Projections for the year-on-year increase in the CPI for fiscal 2024 are higher, but stable for fiscal 2025.

As Japan advances towards fully overcoming deflation, preventing inflation from impeding economic progress becomes paramount. Maintaining stability in the international arena is crucial; any deterioration in global trade conditions, such as disruptions in oil supplies, could drain wealth from the nation and further strain domestic demand. To avert such downturns, Japan must initiate three key initiatives.

Firstly, it must sustain broad-based wage increases across the economy. Although the 2023 „spring offensive“ negotiations resulted in significant wage hikes, they primarily benefited large corporations, leaving small and medium-sized enterprises (SMEs) and non-regular employees with marginal increases. Bridging this gap is essential to ensure equitable wage growth and bolster overall economic prosperity. However, sustaining wage hikes over time poses challenges, particularly for SMEs already facing high labour costs.

Secondly, Japan needs to ensure that rising costs are reflected in the prices of goods and services. While large businesses have been able to adjust their prices to cover increased costs, SMEs have struggled to do so. Reforming trading practices to enable SMEs to pass on higher costs is imperative for their sustainability. Initiatives like the Partnership Building Declaration by the Japan Chamber of Commerce and Industry provide a blueprint for this endeavour.

Thirdly, investment in enhancing productivity is crucial. Simply raising prices to offset higher costs is insufficient; businesses must enhance their profitability by offering higher-value products and services. Amid global uncertainty, Japan’s stability presents an opportunity for increased inward investment. Furthermore, upcoming changes in 2024, such as minimum wage hikes and restrictions on overtime work, aim to encourage businesses to invest in labour-saving technologies like digitalization, ultimately enhancing value-added productivity.

By facilitating these ongoing trends, Japan can mitigate the risk of an inflation-induced downturn and sustain a recovery driven by domestic demand, despite global economic uncertainties. Positive growth prospects suggest the GDP gap may turn positive, marking Japan’s departure from deflation in the latter half of the year. Consumer prices are expected to rise steadily, fuelled by higher wages translating into higher service prices.

Beyond overcoming deflation, Japan aims for sustainable growth. This entails transitioning from a deflationary mindset entrenched during a period of stagnant prices and low interest rates. Embracing a dynamic economy requires businesses, government, and households to adapt, encouraging private sector-led capital flows and fostering workforce flexibility and reskilling. As Japan enters this transformative phase, akin to the awakening of spring, the prospects for sustained growth become increasingly promising. Analysis of climate risk suggests exposure to emission-intensive sectors, but overall resilience to a transition to net-zero emissions by 2050 appears feasible at the system level.

However, significant uncertainties persist regarding Japan’s economic activity and prices, including developments in overseas economic conditions, commodity prices, and domestic firms‘ wage and price-setting behaviours. Consequently, close monitoring of financial and foreign exchange markets is warranted to assess their impact on Japan’s economic outlook. Looking ahead, economic activity risks are broadly balanced from fiscal 2024 onward, while inflation risks lean towards the upside for fiscal 2024 before stabilizing thereafter.

References

Bank of Japan. (2024). Outlook for Economic Activity and Prices. Tokyo: Bank of Japan.

International Monetary Fund. (2024, February 8). Japan: Staff Concluding Statement of the 2024 Article IV Mission. Retrieved from International Monetary Fund: https://www.imf.org/en/News/Articles/2024/02/08/mcs020824-japan-staff-concluding-statement-of-the-2024-article-iv-mission

Morishige, A. (2024, March 22). Economic Outlook for Japan and the World in 2024. Retrieved from Mitsubishi Research Institute: https://www.mri.co.jp/en/knowledge/mreview/202401.html

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