Japan Economic Scenario 2023 and 2024

2023: Resilience in the Face of Global Economic Challenges

In the year 2023, the Japanese yen demonstrated remarkable resilience amidst a backdrop of global economic uncertainty. This resilience was attributed to a strategic blend of accommodating fiscal policies and sustained monetary easing, complemented by the gradual recovery from the lingering effects of the Covid-19 pandemic. The restoration of disrupted supply chains and stabilization of commodity prices further bolstered the yen's performance. This synergy of factors resulted in a weaker yen, which paradoxically had a net positive impact on Japan's economy, acting as a catalyst for sustained economic recovery.

The Bank of Japan (BoJ) opted to maintain its prevailing easing framework, as the necessity to adjust Yield Curve Control (YCC) measures diminished. This reduction in the upward yield pressure was a direct consequence of a weakening global economy and a decrease in depreciation pressures on the yen, largely attributed to monetary tightening measures implemented by key central banks reaching their zenith. Consequently, the yen yield curve experienced bear-flattening pressures, with market sentiment pricing in the likelihood of monetary tightening plateauing soon. This, in turn, led to temporary increases in risk asset prices. However, the fragility of macroeconomic data and earnings suggested that such an upswing might be short-lived. Concurrently, the delay in transitioning to a post-Covid world, coupled with the BoJ's persistent easing policies, acted as a stabilizing force for domestic risk assets, ensuring a relatively high floor.

2024: Emerging Clarity in Consumption and Private Capital Expenditure Recovery

As Japan progressed into 2024, signs of a consumption and private capital expenditure (capex) recovery became increasingly evident. A cyclical upswing in the economy during the latter half of the year, coupled with proactive fiscal policies, set the stage for a consumption-driven resurgence. This revival was underpinned by several key factors: firstly, a labour shortage driving down the unemployment rate and propelling aggregate wages upwards, and secondly, corporations boosting investments to introduce innovative products and services. This heightened demand in the market contributed to a resurgence in inflationary expectations.

With the corporate savings rate remaining positive and deflationary pressures persisting, the Bank of Japan continued to implement its YCC policies. Furthermore, the Federal Reserve's decision to reduce its policy rate raised the bar for the BoJ to contemplate any significant adjustments.

In terms of the yield curve, it was anticipated that any upswing in yields and steepening pressures would remain contained, primarily due to the continuous application of YCC and the prevailing downward pressure on global bond yields. Consequently, risk asset prices were expected to continue experiencing restraint until clear indicators emerged signalling the end of any economic slowdown.

In conclusion, the Japanese yen's performance in the forex market during 2023 and 2024 showcased its adaptability in the face of evolving economic conditions, with the BoJ's policies and global economic dynamics shaping its trajectory. The year 2024 held promise for Japan's economy, with consumption and private capex recovery poised to drive growth and inflation, albeit amidst the backdrop of ongoing central bank strategies and global pressures on yields.

Japan Economics Forecast Table

Source: Crédit Agricole CIB

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