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Japan – Recovery appears set to continue Modupe Adegbembo excludes only fresh food) is on the rise and likely to peak this Junior Economist (G7) quarter. Government intervention is set to cap the increase in Macro Research – Core Investments inflation in 2023 through additional subsidies on energy. Following this, we expect to see inflation fall in 2024, though companies becoming more willing to pass on price increases to Key points their customers provides some upside risks. We expect CPI inflation to average 2.4% in 2022, 2.1% in 2023 and 1.3% in • Japan’s economy looks set to remain robust – we 2024 (consensus 2.3%, 1.6% and 1.0%). That said, the outlook is forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, for inflation to fall back below the BoJ’s target, with having just 2023 and 2024 respectively risen above target due to extreme external pressure, and far • Wage pressures are rising and evidence of firms short of elevated inflation across the globe. passing on cost increases are growing • We expect the BoJ to remain on hold in 2023, but Wage dynamics in Japan appear to be improving but do not yet positive shifts in pricing norms could see yield curve suggest a significant shift in Japan’s pricing norms and spring wage control adjusted in 2024 negotiations will be key. Rengo, Japan’s largest Trade Union • The next BoJ Governor expected in April 2023 could confederation, confirmed it will request a total pay increase of 5% signal a shift in approach. but final results tend to come in below Rengo’s target – in 2022 Rengo aimed for total pay increase of 4% and achieved 2.2%. Recovery set to continue BoJ: The last dove standing The recovery of the Japanese economy looks set to continue. The BoJ continues to emphasise wage growth as a necessary Growth should be supported by the delayed reopening of the condition to changing its ultra-accommodative policy stance. economy from COVID-19 and a recovery in tourism, with the This has remained the philosophy under Haruhiko Kuroda’s borders of the country now fully open to overseas visitors. The governorship, but things may change following the positive growth momentum will be tempered by slowing external appointment of a new Governor in April 2023. Deputy demand – we expect recession in Europe and the US and Governor Masayoshi Amamiya and ex-Deputy Governor Hiroshi below-trend growth in China in 2023. In 2024 we expect Japan Nakaso are seen as frontrunners. Nakaso is widely seen as to continue catching up to its pre-pandemic trend (Exhibit 10). more in favour of reducing monetary stimulus and his We forecast GDP growth of 1.6%, 1.7% and 1.3% in 2022, 2023 appointment would raise the risk of a change in policy from Q3 and 2024 respectively (consensus 1.5%, 1.3% and 1.1%). 2023 after the spring wage negotiations. We currently still do not expect the 2% inflation target to be achieved in a Exhibit 10: Growth continues to recover sustainable manner during our forecast horizon, but we expect Japan: GDP growth contributions the post-Kuroda BoJ to adjust the ultra-accommodative yield %yoy curve control (YCC) policy after taking into account recent 3.0 inflation, shifts in expectations and a gradual rise in wages. 2.0 1.0 In terms of timing, we believe a decision to change BoJ policy is 0.0 unlikely before the spring 2023 wage negotiations. But weaker -1.0 global economic conditions could see the BoJ proceed -2.0 Consumption cautiously and only tweak policy early in the following year -3.0 Government -4.0 Fixed investment when external conditions improve. In addition, we expect the Inventories BoJ to wait for clearer evidence that underlying inflationary -5.0 Net Trade pressures are growing and to see if core inflation remains -6.0 above previous levels once the energy shock dissipates. We 2019 2020 2021 2022 2023 2024 Source: Refinitiv and AXA IM Research, 25 November 2022 expect the BoJ to shift the YCC target of around 0% plus or minus 25 basis points (bps) on 10-year Japanese government Inflation spike to fade, but price pressures growing bond yields to +/-40bps and to make this move in early 2024. Yet this is a finely balanced call and we see risks skewed to the Inflation is set to remain above the Bank of Japan’s (BoJ) target BoJ remaining on hold throughout 2024. in the near term with a weak yen adding to inflationary pressures. Core Consumer Price Index (CPI) inflation (which 15

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