[New Year Interview] Abenomics Architect Professor Ito: "Japan's Economy Starts to Escape Deflation"

2024 Economic Diagnosis Expert Interview ③
Professor It? Motoshige, University of Tokyo

"This year's Japanese economic growth rate is 1%
Expectations for increases in prices and consumption
Some medium-term bankruptcies due to weak yen
Economic metabolism has improved"

"Due to the global economic downturn, Japan's economic growth rate is expected to fall to the 1% range, but the trend of escaping deflation is likely to continue in 2024."

Professor It? Motoshige, Professor Emeritus at the University of Tokyo [Image courtesy of Professor It? Motoshige]

Professor It? Motoshige, a global macroeconomics expert and known architect of Abenomics, expressed in a written interview with Asia Economy that Japan's economy is expected to perform relatively well despite the global economic downturn in 2024.

Professor It? pointed out that the recent Japanese economy shows a distinctly different pattern from the past when it was trapped in the "lost 20 years" of prolonged recession. Prices and wages, which had stagnated for decades, are showing signs of rebound. In 2023, Japan's average wage increase rate reached 3.58%, surpassing 3% for the first time in 30 years. Japan's Consumer Price Index (CPI) also exceeded the Bank of Japan's (BOJ) inflation target of 2% for 15 consecutive months.

Based on this trend, Professor It? forecasted that Japan's economy will continue its movement to escape deflation in 2024. However, he also diagnosed that the process will not be easy. To escape the deflation trap, Japan must address immediate challenges such as wage increases and changes in monetary easing policies.

We heard from Professor It?, who has laid the theoretical foundation that has driven Japan's macroeconomy through "Abenomics," about the economic outlook for Japan next year and advice for the Korean economy.

Below is a Q&A with Professor It?.

- How would you evaluate Japan's economy in 2023?

▲ Despite political uncertainties at home and abroad and the Chinese economic downturn, Japan's economy in 2023 showed signs of escaping deflation and maintained a solid trend. Prices and wages rose around 2%, showing a different picture from the Japanese economy, which had been trapped in deflation for the past 20 years. The vitality of the economy also changed significantly compared to the past recession period.

However, from a long-term perspective, it is premature to say that Japan's economy has completely escaped deflation. Although prices have started to rise for now, most views still consider that deflation has not ended yet.

- In 2023, Japan experienced an unprecedented Yen depreciation. How do you see the impact of the weak Yen on Japan's economy?

▲ It is true that the weak Yen significantly boosted the performance of Japanese companies in 2023.

However, due to excessive Yen depreciation, the cost of importing raw materials from overseas increased, causing some small and medium-sized enterprises to go bankrupt because they could not bear the cost burden. Still, it is difficult to view this only negatively. The previously low interest rates began to rise, and wages increased, resulting in a higher economic metabolism. When the economic structure starts to change, uncompetitive companies disappear, which improves Japan's economic productivity.

However, the widening interest rate gap between Japan and the U.S. due to the Yen's depreciation caused Japan's exchange rate to react extremely to major countries like the U.S., which is problematic. Rapid exchange rate fluctuations can adversely affect corporate performance, so the exchange rate issue needs to be closely monitored.

- What is your forecast for Japan's economic growth rate in 2024?

▲ Like the IMF's prediction in October 2023, I also expect Japan's economy to record a growth rate of about 1% in 2024. The global economy is generally difficult due to China's economic downturn, the Russia-Ukraine war, and high interest rates in major countries. Japan is also expected to see a slight slowdown in economic growth from 2% in 2023 to 1% in 2024 due to the global economic impact.

However, even in such a difficult situation, Japan's economy is expected to maintain an overall solid trend in 2024. The trend of escaping deflation will continue next year, creating merits such as rising prices and increased consumption.

- What do you see as the most important challenge for Japan to escape deflation?

▲ The most important key is wage increases. To escape deflation, a virtuous cycle where wage increases drive up prices must be established. Whether this virtuous cycle takes root depends on the upcoming "Chuntu" (spring wage negotiations between business and labor). Wage increases are difficult to induce through policy alone. Ultimately, it depends on how corporate managers respond, and currently, companies are moving toward wage increases.

The second is the operation of monetary policy. First, to reduce the level of excessive monetary easing, normalization of monetary policy will be necessary. However, rushing to raise interest rates could cause market confusion. Broadly, the easing stance should be maintained while carefully promoting monetary policy normalization.

- When do you expect the BOJ to abolish the negative interest rate policy? What impact will the policy abolition have on the economy?

▲ It seems highly likely that the negative interest rate policy will be abolished in the first half of 2024. Many market participants also expect this. However, the timing of abolition will be greatly influenced by inflation trends. If inflation slows down, the BOJ will have less reason to hastily end the policy.

When the negative interest rate is abolished, the market may experience temporary confusion. However, in the long term, the positive effects of interest rate hikes on the financial market are significant, so it will not cause major disruption to Japan's economy. If interest rates rise moderately, financial institutions' performance will improve, and stock prices will rise.

- The Kishida Fumio Cabinet announced a large-scale tax cut and economic stimulus package worth 17 trillion yen. What is your evaluation of this policy?

▲ It seems they are only rushing to prepare measures for immediate economic recovery. There is no clear medium- to long-term strategy unique to the Kishida Cabinet. Since the 2022 House of Councillors election, Prime Minister Kishida has been able to spend the so-called "golden three years" without large-scale elections until next year. Yet, the administration has continued without major structural reforms such as fiscal reform. While a multi-trillion yen economic stimulus package may be necessary, the current policy can be seen as insufficient.

- With low birth rates and economic recession lowering potential growth rates, what is your outlook for the Korean economy and advice for economic recovery?

▲ Both Japan and Korea must adopt strategies to increase productivity in other ways if population and labor force growth remain sluggish. To increase productivity, companies must actively invest and innovate, and an environment conducive to this must be created. Innovation means challenging new things even if it breaks existing business environments and social structures.

Specifically, GX (green transformation) and DX (digital transformation) are considered innovative industries. In the short term, investment in new industry diversification should be expanded, and in the long term, talent development and expansion of the scientific and technological base necessary for innovation should be pursued. To avoid long-term stagnation, it is important to remember that piecemeal measures are insufficient and that long-term policies such as talent development must be properly implemented.

Strategies must also be devised to respond to geopolitical risks. Of course, Korea has achieved greater success than Japan in terms of innovation. This was the result of active efforts to enter the global market. However, it is necessary to recognize that the global economy is undergoing significant changes due to U.S.-China conflicts and China's economic downturn.