Japan Key themes 2023 – Is BoJ finally out of woods?

While few observers expect to see any growth surprise in Japan, some have started to wonder whether global inflation may finally bring an end to Japan’s long-time disinflationary trend, which will enable the Bank of Japan (BoJ) to start adjusting its Yield Curve Control (YCC) policy. After examining four key themes related to this question, we believe an end to the disinflationary trend to be unlikely.

What you will learn:

1. First, are firms regaining pricing power? The rise in core goods inflation has indeed exceeded our expectation. After decades of cost-cutting efforts, firms have little capacity left to absorb a jump in imported inflation and see lesser risk of losing market share in raising prices in concert with competitors.
2. Second, are we at the start of a wage-price spiral? While a higher wage settlement in 2023 is likely as firms compensate for the rising cost of living through a one-time payment, such a move is not sustainable. Corporate profits are suffering from significant cost increases, and even profitable firms hesitate to increase fixed-labour costs for the sake of long-time job security.
3. Third, what prospects lie ahead for the yen? Although the dollar-yen peak may be behind us, the weak yen is likely to persist through 2023 unless there the Fed pivots. We project that the impact of yen weakness on inflation will gradually fade starting in H2 2023 and that criticism of the BoJ for inviting currency weakness will recede.
4. Finally, a new BoJ governor will make no difference in policymaking. Without the prospect for achieving the 2% inflation target, the BoJ has little incentive to adjust YCC policy despite the diminished function of the JGB market. Amidst projected fiscal expansion in the coming years, the government will need YCC policy more than ever to secure stable fiscal funding.