Given the scale of the global impact being felt as a result of the Russian invasion of Ukraine, Japan too is assessing how to mitigate risk and navigate the current turbulent landscape.
However, our view is that a rise in investor appetite will be driven by the steady recovery of the economy, for which we are seeing positive signs, and policymakers’ willingness to maintain an accommodative monetary policy.
Of course, we need to continue to pay close attention to risks, such as soaring energy costs and commodity prices, but we believe Japan is well positioned to absorb these and Japanese business is set to see positive results based on increased investment activity – creating an attractive investment proposition for foreign investors over the coming months.
Outlook on the Japanese economy
Despite the uncertain times we are living in, we are optimistic about Japan’s economic recovery and growth. When it comes to the global economy, we expect momentum to pick up after a temporary slowdown due to the Covid-19 Omicron wave in the first quarter of 2022.
However, the big question now is how the Ukraine crisis could affect global growth. We estimate the negative impact on global growth will be -0.7 per cent over a two-year period (2022-23), assuming oil prices peak at around $120 (£93) per barrel. The negative impact will differ greatly by country and region, depending on their economic and financial exposure to Russia.
We project that Japan could grow by more than 2 per cent in 2022. Japan has a relatively low exposure to Russia and limited reliance on Russian trade. Russia accounted for only 1 per cent of Japan’s exports and 1.8 per cent of its imports last year.
As for Japanese banks, their exposure to Russia at the end of September 2021 was around $9.6bn, lower than the US and some European economies such as Italy whose exposures are $14.7bn and $25.3bn respectively. The negative impact of the Ukraine crisis on Japan will largely be through higher commodity prices, particularly the price of crude oil.
According to Japan’s Cabinet Office’s models, a 20 per cent rise in the price of crude oil would depress Japan’s real GDP by 0.08 per cent, so a 20 per cent to 30 per cent rise in energy prices would only mean around a 0.2 per cent reduction in Japan’s real GDP growth. Therefore, while the impact of steeper energy prices is not negligible, it is manageable, and still means Japan’s economic growth could exceed 2 per cent in the current financial year.
Bank of Japan to maintain monetary policy
Due to changes in board membership, we expect the Bank of Japan (BoJ) board to become slightly less dovish. However, with inflation (excluding food and energy prices) still close to zero, changes in monetary policy, if any, should be very limited.
Next year, the BoJ may consider some changes but they are likely to be minimal, such as widening the range allowed by the BoJ for long-term interest rates.
