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SINGAPORE, February 22, 2023 – The Japanese economy is expected to grow at 1.2 percent in 2023 above its potential growth rate after a moderate 1.1 percent recovery in 2022. Key near-term risks include the deepening global energy crisis, the U.S. Fed’s more aggressive tightening and a sharper slowdown in major global economies. With the COVID-19 pandemic becoming endemic, policy focus should be shifted toward more flexible monetary policy and accelerated fiscal consolidation.

These policy recommendations are highlighted in the 2022 Annual Consultation Report on Japan published by the ASEAN+3 Macroeconomic Research Office (AMRO) today. The report is based on AMRO’s Annual Consultation Visit to Japan which was completed on November 11, 2022, and data and information available up to December 23, 2022.

Recent developments and outlook

The Japanese economy continued to recover at a moderate pace in 2022, albeit volatile, as the COVID-19 pandemic has shifted gradually to an endemic phase. Private consumption remained robust, underpinning the recovery of economic activities from the pandemic. Business investment began to show some signs of improvement. Exports continued to grow at a slower pace than imports.

Consumer price inflation accelerated in 2022, driven by soaring energy and food prices. Core Consumer price index (CPI), less fresh food, rose by 3.7 percent year-on-year in November 2022, which exceeded the Bank of Japan’s (BOJ) price stability target. Looking ahead, core CPI (less fresh food) inflation is projected to slow to 1.2 percent in 2023 from 2.3 percent in 2022.

Japan’s external position stayed strong in 2022, supported by a large primary income surplus and substantial foreign reserves despite widening trade deficits. The yen depreciated sharply against the U.S. dollar, by more than 12 percent in 2022, reflecting a diverging monetary policy stance and widening trade deficit.

Credit growth recovered to the pre-pandemic level. The overall banking system remains largely sound in terms of its asset quality, capital buffers, and profitability.

The fiscal deficit narrowed in FY2021 on the back of strong revenue collection after widening in FY2020 as a result of the massive COVID-19 stimulus packages. To mitigate the impact of price increases and revitalize the economy, in October 2022, the government announced an economic package, equivalent to 6.9 percent of GDP. As a result, the fiscal deficit is expected to widen to 9.4 percent in FY2022 from 5.9 percent in FY2021.

Risks, vulnerabilities, and challenges

Japan’s macro-financial outlook is tilted to the downside with substantial uncertainties, mainly from the external sector. A resurgence of global energy prices would adversely affect the Japanese economy, which relies on energy imports, by worsening the terms of trade and weighing down domestic consumption. A further divergence in monetary policy between Japan and other advanced economies could lead to a steeper yen depreciation and higher import prices. A recession in the U.S. and Europe would adversely affect Japan’s manufacturing and export sectors by dampening global demand.

Medium to long-term vulnerabilities and challenges include low profitability of regional banks, weakening fiscal discipline, side effects from prolonged monetary easing, and demographic drag from population aging and low fertility rates.

Policy recommendations

Under the baseline projection that inflation will peak and start to decline in the near term, the BOJ’s easy monetary policy stance remains appropriate. That said, given the upside risk of a higher inflation rate becoming entrenched, the BOJ should stand ready to adjust its monetary policy, for example, by raising its 10-year Japanese Government Bond (JGB) yield target and/or further widening the current band.1

Considering the heightened uncertainties in the post-pandemic global economy and experiences of the past decade, the BOJ’s monetary policy framework could be reviewed to allow for greater flexibility by introducing a price stability target band of 1 to 3 percent as a more practical and realistic goal.

The government should place a higher priority on strengthening fiscal prudence, while providing targeted supports to low-income households suffering from higher energy and food prices. As the COVID-19 pandemic subsides and economic activities resume, extensive fiscal stimulus measures should be terminated or phased out so that the pre-crisis fiscal consolidation program can be put back on track.

To achieve its primary balance target, the government should formulate a comprehensive post-pandemic fiscal consolidation plan with specific fiscal targets and policy measures.

Structural reforms should be implemented with greater urgency to enhance growth potential, as short-term stimulus measures are phased out. Measures such as greater efforts to attract more people to participate in the labor market, particularly female, elderly, and foreign workers, should be strengthened.

The government should continue to ramp up work-style reform and digital transformation initiatives to incentivize Japanese firms into adjusting their traditional working styles to new employment trends, such as teleworking and gig workers, as well as leveraging new technologies to enhance total factor productivity.

1 AMRO had shared this view with Japanese authorities during the 2022 Annual Consultation Visit ahead of the BOJ’s policy announcement on 20 December 2022. See the details at

About AMRO

The ASEAN+3 Macroeconomic Research Office (AMRO) is an international organization established to contribute towards securing macroeconomic and financial stability of the ASEAN+3 region, comprising 10 members of the Association of Southeast Asian Nations (ASEAN) and China; Hong Kong, China; Japan; and Korea. AMRO’s mandate is to conduct macroeconomic surveillance, support the implementation of the regional financial arrangement, the Chiang Mai Initiative Multilateralisation (CMIM), and provide technical assistance to the members.

About AMRO’s Annual Consultation Report

The Annual Consultation Report was prepared in fulfillment of AMRO’s mandate. AMRO is committed to monitoring, analyzing and reporting to its members on their macroeconomic status and financial soundness. It also helps identify relevant risks and vulnerabilities, and assists members, if requested, in the timely formulation of policy recommendations to mitigate such risks.