Japan’s economy is expected to continue growing faster than its potential rate

August 5, 2022

Outlook for Economic Activity and Prices (July 2022) in Japan

Japan’s economy is likely to recover toward the middle of the projection period, with the impact of the novel coronavirus (COVID-19) and supply-side constraints waning, although it is expected to be under downward pressure stemming from a rise in commodity prices due to factors such as the situation surrounding Ukraine. Thereafter, as a virtuous cycle from income to spending intensifies gradually, Japan’s economy is projected to continue growing at a pace above its potential growth rate.

The year-on-year rate of change in the consumer price index (CPI, all items less fresh food) is likely to increase toward the end of this year due to rises in prices of such items as energy, food, and durable goods. Thereafter, the rate of increase is expected to decelerate because the positive contribution of the rise in energy prices to the CPI is likely to wane. Meanwhile, in terms of inflation excluding energy, for which prices fluctuate significantly, the year-on-year rate of change in the CPI (all items less fresh food and energy) is expected to increase moderately in positive territory on the back of improvement in the output gap and rises in medium- to long-term inflation expectations and in wage growth.

Comparing the projections with those presented in the previous Outlook for Economic Activity and Prices (Outlook Report), the projected growth rate for fiscal 2022 is lower due to the effects of such factors as a slowdown in overseas economies and intensification of supply-side constraints. However, the projected growth rates thereafter are somewhat higher, partly owing to a rebound from the lower projection for fiscal 2022. The projected rates of increase in the CPI are higher, mainly for the near term, reflecting the impact of a rise in import prices and of a pass-through of that rise to consumer prices.

Concerning risks to the outlook, there remain extremely high uncertainties for Japan’s economy, including the course of COVID-19 at home and abroad and its impact, developments in the situation surrounding Ukraine, and developments in commodity prices and in overseas economic activity and prices. In this situation, it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices.

With regard to the risk balance, risks to economic activity are skewed to the downside for the time being but are generally balanced thereafter. Risks to prices are skewed to the upside for the time being but are generally balanced thereafter.

Source: Bank of Japan-Outlook for Economic Activity and Prices (July 2022)
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