Global Turbulence Shakes Japan’s Growth Outlook

This story is part of Forbes’ coverage of Japan’s Richest 2022. See the full list here.

Global headwinds are shaking Japan’s growth outlook. The fallout from rising geopolitical risk, Omicron’s lingering presence and inflation threaten to stall the recovery of the world’s third-largest economy. After 2021’s post-pandemic bump, real GDP is expected to grow 2.1% this year, then slow to 1.8% in 2023 and 1.1% in 2024.

The Russia-Ukraine conflict not only puts Japan’s energy security into question, the knock-on surge in global oil and commodity prices leaves the Bank of Japan with a tough decision. Stay the course with endless quantitative easing (which began as a way out of deflation following Japan’s asset bubble collapse in the 1990s) or rethink zero interest rates as inflation accelerates.

There’s been a global shift away from easy money as central banks end pandemic bond-buying programs. G7 policymakers are expected to shrink their balance sheets by about $410 billion this year. The Bank of Japan, however, has remained committed to asset purchases—even scaling up the program in recent weeks to defend its policy of controlling bond yields, which sent the Japanese yen tumbling against the U.S. dollar.

Like the Swiss franc, the yen has long been considered a safe haven. This year, it’s not only Asia’s worst performer, but also at the bottom of all G10 currencies. Coupled with inflationary pressures, its weakness is dealing a hard blow to an economy used to deflation. Companies are breaking with longstanding custom to absorb price increases by passing on costs to consumers. Economists put the chance of recession over the next 12 months at 30%. The government may find itself under pressure to spend more to cushion the blow, worsening its fiscal position.