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The full reopening of Japanese borders has been a boon to businesses as the country comes to terms with the hard reality of co-existing with COVID. But with the world grappling with slowing growth and pressing concerns like geopolitical shifts, the journey back to pre-COVID days may prove to be a long ride.

In this interview, Capital Group’s economist Anne Vandenabeele shares her view on the outlook for Japan, the potential benefits from the reordering of supply chains, and where she sees opportunities in the years ahead.

What is your outlook for Japan amid the potential global economic slowdown?

It may be difficult for export-dependent Japan to avoid a recession should a significant global slowdown materialise. The combination of economic weakness in China, persistent global inflation, and interest rate hikes in the US and Europe could result in a drag on real activity (non-financial activity) in Japan.

A key positive is the reopening of its borders to foreign travellers back in October 2022. This alone, based on my estimates, has the potential to add 0.5 percentage points to real gross domestic product (GDP) growth, and up to 0.8 percentage points once quarantine-free travel is allowed for Chinese visitors. At its peak in 2019, the travel and tourism sector added US$359 billion to Japan’s GDP; that year, foreign visitors to Japan rose to a record 31.9 million.¹

But high energy costs and slowing economic activity could impede global travel demand. Still, the expected boost from tourism could offset the impact of the trade deficit and render some marginal support for the yen.

Major shifts are underway in global supply chains. Can Japan benefit from this trend?

Japanese businesses and policymakers have been working to enhance the resilience of supply chains and secure their economic lifelines amid a rise in geopolitical uncertainty. The passage of the Economic Security Promotion Act gives the government more oversight of companies that rely on foreign suppliers for critical input and services. I believe this could be a milestone that kicks off a significant restructuring of supply chains in the coming years.

Japan will likely be a beneficiary of friend-shoring (a shift in manufacturing towards allies), especially for labour-light and automated processes such as precision manufacturing. The country’s leading position in automation technology could strengthen should the supply of these technologies to the US, Europe and its other Quad² allies increase over time.

1. Sources: Japan Tourism Agency, Japan External Trade Organization.

2. Quad, also known as the Quadrilateral Security Dialogue, is a diplomatic network comprising Australia, India, Japan and the US.

 

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