1、Whi le we expect Japans real GDP growth to slow to 1.3%i n 2023,from 1.5%i nn2022,we look for growth to conti nue to outpace i ts potenti al.Consumpti on i sli kely to di rectly benefit from economi c reopeni ng,and we also expect capex toremai n firm on the back of pent-up demand,labor shortages du

2、e both todemographi cs and reopeni ng,and supply chai n rebui ldi ng.We see a contrast i nexternal demand between goods and servi ces,wi th goods exports softeni ngpredomi nantly i n H1,on global economi c slowdown,and servi ces exportsi mprovi ng steadi ly throughout the year led by i nbound spendi

3、 ng.We forecast core CPI i nflati on(excludes fresh food)wi ll decelerate after peaki ngnat around 3.5%at end-2022,thanks i n part to the governments new energysubsi di es,but remai n above 2%through most of the year owi ng largely to thecumulati ve i mpact of the weak yen comi ng to the fore.Market

4、 i nterest i n FY2023 Shunto and wage growth has been ri si ng markedly,asnthe BOJ has posi ti oned wage growth of at least 3%as a prerequi si te for stableachi evement of i ts 2%i nflati on target.We expect an accelerati on i n basi c wagegrowth reflecti ng hi gh i nflati on effecti vely canceled o

5、ut by a decelerati on i nbonuses and other wages chi efly due to a slowdown i n corporate earni ngsgrowth,resulti ng i n largely flat overall wage growth j ust shy of of 2%.Gi venstrong i nflati onary pressures and reopeni ng effects,we beli eve ri sk i s ti lted tothe upsi de.However,stable wage gr

6、owth of 3%sti ll seems to be a di stantprospect,unless the corporate mi ndset changes meani ngfully.BOJ Governor Kurodas second term i s set to end i n Apri l 2023.We do notnexpect an expli ci t rate hi ke even under the new leadershi p i n 2023,chi efly due tothe above-noted wage factor and the Ki

7、shi da admi ni strati ons concerns aboutglobal slowdown.Thi s could also be true for 2024,unless the Ki shi daadmi ni strati on has more i ncenti ve to encourage poli cy normali zati on.That sai d,adj ustments to forward gui dance wi th an easi ng bi as and wi deni ng the 10-yearyi eld band i n 2023

8、 are possi bi li ti es,i n our vi ew.Naohi ko Baba+81(3)6437-9960|naohi Goldman Sachs Japan Co.,Ltd.Tomohi ro Ota+81(3)6437-9984|tomohi Goldman Sachs Japan Co.,Ltd.Yuri ko Tanaka+81(3)6437-9964|yuri Goldman Sachs Japan Co.,Ltd.Japan Economics Analyst 2023 Outlook:Focus on Wage Growth and BOJ Leaders

9、hi p Change17 November 2022|8:52AM JSTI nvestors should consi der thi s report as only a si ngle factor i n maki ng thei r i nvestment deci si on.For Reg AC certi ficati on and other i mportant di sclosures,see the Di sclosure Appendi x,or go to following is a redacted version of the original report

10、 published 17 November,2022 25 pgs.2023 Outl ook:Focus on Wage Growth and BOJ Leadershi p Change Global Economic Out look Furt her Slowdown Expect ed in 2023 Global growth decelerated steeply i n 2022 on the combi ned effects of a di mi ni shi ng reopeni ng i mpulse,fiscal and monetary ti ghteni ng,

11、Chi nas economi c challenges,and the Russi a-Ukrai ne war.We expect global growth of j ust 1.8%i n 2023 from 2.9%i n 2022,wi th US resi li ence contrasti ng wi th a European recessi on,albei t a moderate one,and a bumpy reopeni ng i n Chi na(Exhi bi t 1).1 Key poi nts are as follows.Fi rst,we expect

12、 the US economy to avoi d a recessi on,despi te our updated outlook of the further ti ghteni ng by the Fed whi ch we thi nk wi ll hi ke another 125bp to a termi nal rate of 5-5.25%(4.75-5%previ ously)duri ng 2023.Second,the Euro area and the UK are probably already i n recessi on,as household real i

13、 ncome i s eroded by surgi ng energy bi lls.That sai d,we see no deep recessi on as European nati ons have already managed to substanti ally cut reli ance on Russi an gas wi thout damagi ng economi c acti vi ty.Thi rd,recovery i n Chi na i s li kely to be moderate i n 2023H1 as an expected reopeni n

14、g i n Q2 may i ni ti ally rai se COVI D-19 cases.We see a more tangi ble recovery i n H2 on a reopeni ng boost,but our long-run Chi na vi ew remai ns cauti ous on structural weakness i n both demographi cs and producti vi ty and the long slump i n the property market.1See Jan Hatzi us et.al.,“Macro

15、Outlook 2023:Thi s Cycle I s Di fferent,”Global Economi cs Analyst,November 16,2022.Exhibit 1:Global Growt h t o Slow Again in 2023 Gl obal Real GDP Growth Forecasts ActualGSConsensusGSConsensusGSConsensusUS5.9 1.9 1.8 1.1 0.4 1.6 1.4 Japan(CY)1.6 1.5 1.6 1.3 1.4 1.4 1.1 (FY)2.3 1.7 1.9 1.2 1.2 1.5

16、Euro area5.3 3.3 3.1-0.1-0.1 1.4 1.5 Germany2.6 1.8 1.6-0.6-0.7 1.4 1.3 France6.8 2.5 2.5 0.1 0.4 1.3 1.3 Italy6.7 3.8 3.5-0.1-0.1 1.3 1.2 Spain5.5 4.6 4.5 0.6 1.0 2.1 2.0 UK7.5 4.4 4.2-1.2-0.5 0.9 1.1 Asia ex.Japan6.6 3.5 3.3 3.8 4.5 China8.1 3.0 3.3 4.5 4.8 5.3 5.0 India8.3 6.9 7.1 5.9 5.8 6.5 6.6

17、 Korea4.1 2.4 2.6 1.4 1.8 2.5 2.4 Australia4.9 4.0 4.0 1.9 2.0 1.7 1.9 Brazil4.6 2.9 2.7 1.2 0.8 2.2 1.9 Russia4.7-3.3-4.0-1.3-3.2 1.8 1.5 DM5.3 2.5 2.5 0.7 0.6 1.5 1.6 EM7.3 3.5 3.1 3.4 4.0 4.4 4.4 World6.1 2.9 2.9 1.8 1.8 2.8 2.6 20224Source:Bloomberg,Goldman Sachs Global Investment Res

18、earch17 November 2022 2Gol dman SachsJapan Economi cs Anal ystJapans Economic Out look 1.Execut ive SummarySoft ening Ext ernal Demand a Drag,but Reopening and Robust Capex t o Maint ain Above-Pot ent ial Growt h Exhi bi ts 2 and 3 show our new forecasts for the Japanese economy.Whi le we expect rea

19、l GDP growth to slow to 1.3%i n 2023,from 1.5%i n 2022,we look for growth to conti nue to outpace the potenti al growth rate of 0.8%.Consumpti on i s li kely to benefit di rectly from economi c reopeni ng.We also expect robust capex growth on cumulati ve pent-up demand,the need to address labor shor

20、tages due to worseni ng demographi cs and reopeni ng,and supply chai n rebui ldi ng.As for external demand,we see a contrast between goods and servi ces exports.We forecast softer goods exports,parti cularly i n H1,due to the global economi c slowdown ami d the droppi ng-out of pandemi c-dri ven dem

21、and for goods.I n contrast,we expect servi ces exports wi ll steadi ly i mprove throughout the year,led by i nbound spendi ng,i n the wake of the li fti ng of border controls by the Japanese government i n October.We forecast core CPI i nflati on(excludes fresh food)wi ll peak at end-2022 at around

22、3.5%and decelerate i n 2023 due i n part to the governments newly i ntroduced energy subsi di es.That sai d,we expect core CPI i nflati on to remai n above 2%duri ng most of 2023,owi ng largely to the cumulati ve i mpact of yen weakness.Our forex team recently revi sed up thei r USD/JPY forecasts to

23、 155 i n 3 and 6 months before easi ng to 140 i n 12 months,from 150/135/125.2 Our commodi ty team mai ntai ns thei r bulli sh forecasts for Brent oi l pri ce at$115/bbl,$105,and$110 for the next 3,6,and 12 months.2See Karen Fi shman,“The Path FOrward for USD/JPY,”Global Markets Dai ly,November 9,20

24、22.Exhibit 2:Anot her Above-Pot ent ial Growt h Year Expect ed,Despit e Slowdown Economi c Outl ook f or Japan Calendar Year Fiscal Year 20212022E2023E2024E20212022E2023E2024EReal GDP(YOY%)1.6 1.5 1.3 1.4 2.31.71.21.5 Consumption1.3 3.0 1.3 0.8 2.63.00.90.9 Capex-0.9 2.0 4.2 2.2 0.63.93.42.1 Housing

25、 Investment-2.0-4.3 0.5 1.9-1.7-4.01.32.1 Private Inventories(contribution)-0.2 0.4-0.1-0.1 0.10.2-0.10.0 Export11.8 4.6 4.2 6.6 12.44.84.46.9 Import5.1 7.9 5.4 4.7 7.17.84.74.8 Government Spending2.1 1.6 0.7 0.7 2.01.40.60.7 Public Fixed Investment-2.7-6.7 2.5 1.9-7.5-2.22.21.8 Net Exports(cont.)1.

26、1-0.6-0.2 0.3 0.9-0.6-0.1 0.4 Private Domestic Demand (cont.)0.4 2.2 1.3 0.8 1.52.21.00.8 Public Demand(cont.)0.3 0.0 0.3 0.2 0.00.10.20.2Nominal GDP(YOY%)0.81.32.63.71.31.93.03.4Industrial Production(YOY%)5.61.22.04.45.72.21.84.9Core CPI(YOY%)-0.22.22.51.40.12.72.41.1New Core CPI(YOY%)-0.51.02.41.1

27、-0.81.92.10.9Unemployment Rate(%)2.82.62.52.42.82.62.52.4Current Account(tn)21.68.81.67.820.35.53.37.6BOJ Policy Rates(End of Period;%)Short-Term Target-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.1010-Year Target0.000.000.000.000.000.000.000.00USD/JPY(End of Period)115.1145.0140.0140.0121.4155.0140.0140.0

28、EUR/JPY(End of Period)130.0143.6147.0147.0134.7145.7147.0147.0Source:Goldman Sachs Global Investment Research17 November 2022 3Gol dman SachsJapan Economi cs Anal ystFocus on Wage Growt h and BOJ Leadership Change Meanwhi le,market i nterest i n FY2023 shunto(spri ng wage negoti ati ons between labo

29、r uni ons and management)and resultant macro wage growth has been ri si ng markedly,as the BOJ has posi ti oned macro wage growth of at least 3%as a prerequi si te for stable achi evement of i ts 2%i nflati on target.We forecast basi c wage growth wi ll accelerate i n FY2023,chi efly reflecti ng hi

30、gh i nflati on i n FY2022,whereas bonuses and other wages wi ll decelerate chi efly due to a slowdown i n corporate earni ngs and more generally economi c acti vi ty,resulti ng i n essenti ally flat overall wage growth j ust shy of 2%i n FY2023.Gi ven on-goi ng strong i nflati onary pressures and se

31、vere worker shortages,we beli eve near-term ri sk i s ti lted to the upsi de.However,stable wage growth of 3%sti ll seems to be a di stant prospect,unless the corporate mi ndset becomes meani ngfully more constructi ve.On the poli cy front,BOJ Governor Kurodas second term i s set to end i n Apri l 2

32、023,and wi ll herald a transi ti on to new leadershi p.Even under the new governor,however,we do not expect an expli ci t rate hi ke duri ng 2023 due to the above-noted wage factor.The Ki shi da admi ni strati on i s also li kely to mai ntai n the current monetary easi ng poli cy,owi ng to i ts conc

33、erns about a global economi c slowdown and i ts potenti al negati ve i mpact on the Japanese economy.Thi s could also be true for 2024,unless the Ki shi da admi ni strati on has more i ncenti ve to encourage monetary poli cy normali zati on,even after global economi c concerns abate.That sai d,adj u

34、stments to the current forward gui dance(potenti ally removi ng the easi ng bi as)and/or wi deni ng the 10-year yi eld band are possi bi li ti es i n 2023.Exhibit 3:Consumpt ion and Capex Driving Japans Economy in 2023 Real GDP Growth and i ts Breakdown-5-4-3-2-10123-5-4-3-2-212022E2023E2

35、024EConsumptionCapexNet ExportsReal GDP Growth(YOY%)(YOY%)Our ForecastCYSource:Cabi net Of fice,Goldman Sachs Global Investment Research17 November 2022 4Gol dman SachsJapan Economi cs Anal yst2.Det ailed Out lookConsumpt ion:Robust on Reopening,But Weighed Down Gradually by Inflat ion Duri ng the p

36、andemi c,consumpti on has remai ned closely correlated wi th the governments restri cti ons on people mobi li ty(Exhi bi t 4 LHS).Whi le the number of new COVI D-19 cases conti nues to ri se and fall i n waves,the pandemi c i tself i s bei ng di scussed wi th less frequency i n Japan,and the sense o

37、f excessi ve cauti ousness among consumers appears to have di ssi pated somewhat.The government has also been gradually easi ng the pandemi c-related restri cti ons.I t not only effecti vely removed border controls from October,but also launched new measures ai med at sti mulati ng touri sm demand(n

38、ati onwi de travel subsi di es),among others.Agai nst thi s backdrop,consumpti on i s belatedly starti ng to benefit from economi c reopeni ng.Hi gh-frequency credi t card data shows that servi ces consumpti on turned upward strongly from September and i s around 5%hi gher than the pre-pandemi c lev

39、el(Exhi bi t 4 RHS).The reopeni ng boost notwi thstandi ng,households are sti ll faci ng a challengi ng envi ronment as consumer confidence i s worseni ng wi th real wage growth i n negati ve terri tory(Exhi bi ts 5,6).However,we sti ll expect consumpti on to pi ck up i n the near term on the back o

40、f reopeni ng benefits,supported by over 60 tn i n“forced savi ngs,”stemmi ng from the lost opportuni ti es to spend duri ng the pandemi c(equi valent to 11%of GDP;Exhi bi t 7).3 That sai d,we also expect reopeni ng momentum wi ll peak i n the next 6 months or so and wane afterwards,gradually wei ghe

41、d down by i nflati on.We see downsi de ri sk to our consumpti on forecasts parti cularly i f large upti cks i n COVI D-19 cases lead to people becomi ng cauti ous agai n and refrai ni ng si gni ficantly from outsi de acti vi ti es and the government agai n rei nforci ng mobi li ty restri cti ons.3Se

42、e Naohi ko Baba,“From Forced Savi ngs to Pent-Up Spendi ng,”Japan Economi cs Analyst,September 10,2021.Exhibit 4:Economic Reopening Effect Is Finally Becoming Evident in Consumpt ion Mobility and BOJ Consumption Activity IndexJCB Consumption Now(Semi-Monthly)4050607080901002020/12020/7202

43、1/12021/72022/12022/7BOJ Consumption Activity Index(LHS)V-RESAS Mobility(RHS)(Index)OurForecast(Index)-505101520-20-15-10-5051015202022/12022/32022/52022/72022/9GoodsServices(vs.2016-2018 Base;%)Source:BoJ,Cabi net Of fice,Nowcast Inc.,Goldman Sachs Global Investment Research17 November 2022 5Gol dm

44、an SachsJapan Economi cs Anal ystManufact uring Act ivit y:Supply Const raint s t o Give Way t o Soft er Ext ernal Demand Japans producti on staged a V-shaped recovery i n 2020,chi efly dri ven by exports,but both have shown di recti onless,volati le movements si nce 2021,mai nly due to supply chai

45、n di srupti ons centeri ng on automobi les(Exhi bi t 8 LHS).I n 2022,auto producti on dropped sharply agai n i n May owi ng to supply bottlenecks i n essenti al components/parts caused by the zero-COVI D strategy i n Chi na.That sai d,Japans supply chai n,whi ch has been slower to i mprove than othe

46、r maj or countri es,i s finally back on a steady recovery path(Exhi bi t 8 RHS).Goi ng forward,we expect manufacturi ng acti vi ty to be i nfluenced more by softeni ng external demand than supply constrai nts.We forecast slowi ng global growth Exhibit 5:Real Wage Growt h Remains in Negat ive Territ

47、ory Nomi nal and Real Wage Growth Exhibit 6:Consumer Confidence Has Been Det eriorat ing Consumer Confidence and 1-Year Inflati on Expectati ons-3-2-10123-3-2-022Nominal WageReal Wage(YOY%;3MMA)(YOY%;3MMA)03540452008200022Consumer Confidence(LHS

48、)1Y Inflation Expectations(RHS)2022/1GFC(YOY%)(Index)East JapanEarthquakeTax HikeTax HikeSource:MHLWSource:Cabi net Of fice,Data compi led by Goldman Sachs Global Investment ResearchExhibit 7:Forced Savings t o Support Reopening Effect For t he Time Being Forced Savi ngs FlowStock6668707274767880666

49、870727476788020022Forced SavingsOf Which ServicesActual ConsumptionHypothetical Consumption(JPY TN)(JPY TN)00002020/32020/92021/32021/92022/3ServicesGoods(JPY TN)(JPY TN)Forced Savings from Shortfallin Consumption of Source:Cabi net Of fice,BoJ,Goldman Sachs Global I

50、nvestment Research17 November 2022 6Gol dman SachsJapan Economi cs Anal ystmomentum especi ally i n 2023H1.I n terms of the short-term manufacturi ng cycle,OECD countri es have already entered a contracti on phase.Japans manufacturi ng sector i s sti ll i n a slowdown phase,but we expect i t to move

51、 i nto a contracti on phase duri ng 2023H1,as weaker external demand takes a toll(Exhi bi t 9).That sai d,from 2023H2,we expect recovery not only i n Europe and the US,but also more notably i n Chi na wi th gradual deregulati on of the zero-COVI D poli cy.Wi th these tai lwi nds,Japanese manufacturi

52、 ng acti vi ty i s li kely to regai n momentum.We also thi nk substanti al depreci ati on of the yen wi ll make some posi ti ve contri buti on to growth i n goods exports.However,as i ts i mpact on real exports has faded structurally,especi ally due to offshori ng of producti on bases by manufacture

53、rs,Japans goods exports are predomi nantly i nfluenced by the global demand.4 4See Naohi ko Baba and Yuri ko Tanaka,“FAQ on Nexus Between Forex and Manufacturi ng Acti vi ty,”Japan Economi cs Analyst,July 11,2022.Exhibit 8:Changing Theme in Product ion From Supply Const raint s t o Slowing Ext ernal

54、 Demand Production,Exports,and Domestic Goods ShipmentsSuppliers Delivery Time Indices(PMI)8085909585909502020212022Production(LHS)Domestic Shipments(LHS)Real Exports(RHS)(3M MA;2019=100)(3M MA;2019=100)-202020212022JapanMainland ChinaUS(Z-Score;Average=0)(Z-Sc

55、ore;Average=0)ImprovesSource:Mi ni stry of Economy,Trade and Industry,BoJ,Haver,Data compi led by Goldman Sachs Global Investment ResearchExhibit 9:Japan Set t o Follow Ot her Major Economies in Manufact uring Cycle Manuf acturi ng Cycl e Based on OECD Leadi ng Indi cators OECDJapan-10-8-6-4-2024-15

56、-10-505101520SlowdownExpansionContractionRecovery2022/9Deviation Rate from 36-Month MA(%)Semi-Annual Growth Rate(%;Annualized)2020/12020/4-3-2-1012-5-4-3-2-1012345SlowdownExpansionContractionRecovery2022/9Deviation Rate from 36-Month MA(%)Semi-Annual Growth Rate(%;Annualized)2020/12020/5Source:OECD,

57、Data compi led by Goldman Sachs Global Investment Research17 November 2022 7Gol dman SachsJapan Economi cs Anal ystInbound Spending:St ill Long Road t o Full Recovery,but St eady Gains Expect ed I nbound spendi ng(posted as servi ce exports)reached around 5 tn i n 2019(0.8%of 2019 GDP),but dropped t

58、o almost nothi ng duri ng the pandemi c and the hi stori c slump conti nued unti l the summer of 2022(Exhi bi t 10 LHS).The Ki shi da admi ni strati on finally removed the dai ly entry cap on forei gn vi si tors i n October.Followi ng thi s,the number of forei gn vi si tors to Japan i n September ex

59、ceeded 200,000 for the first ti me si nce February 2020.Our ball-park esti mati on poi nts to potenti ally larger annual i nbound spendi ng of 6.6 tn post full reopeni ng vs.the pre-pandemi c level of 5 tn,partly helped by the weak yen.5 Accounti ng for outbound spendi ng by Japanese vi si tors over

60、seas(2.3 tn),net i nbound spendi ng would be 4.3 tn(equates to 0.8%of 2022 nomi nal GDP;Exhi bi t 11 LHS).However,we expect a full recovery i n i nbound spendi ng to take unti l 2024,mai nly because of Chi nas zero-COVI D poli cy.I n 2019,Chi nese travelers accounted for 30%and 36%of forei gn vi si

61、tors to Japan and i nbound spendi ng,respecti vely(Exhi bi t 10 RHS).However,due to stri ct departure and reentry restri cti ons i n Chi na under the countrys zero-COVI D poli cy,together wi th Japans delayed reopeni ng,Chi nese vi si tors have accounted for less than 13%of total vi si tors si nce t

62、he begi nni ng of 2022.Our Chi nese economi cs team expects related regulati ons to start easi ng from 2023Q2,but for thi s to i ni ti ally be restri cted to domesti c travel,wi th overseas travel restri cti ons not bei ng loosened unti l Q3.We therefore thi nk a full recovery i n Chi nese i nbound

63、spendi ng wi ll have to wai t unti l 2024.As a result,we forecast i nbound spendi ng of 2.8 tn by end-2023,around 60%of the 2019 level(Exhi bi t 11 RHS).Accounti ng for outbound travelers,net i nbound spendi ng would be 1.2 tn at 2023-year-end.5See Yuri ko Tanaka and Naohi ko Baba,“I nbound Spendi n

64、g Post Reopeni ng:I mpli cati ons for External Balance,”Japan Economi c Flash,September 22,2022.Exhibit 10:Inbound Spending Declined Drast ically During t he Pandemic Number of Foreign Visitors to JapanInbound Spending Share(2019)China36%Korea8%Taiwan11%HK7%Other Asia16%US7%Europe9%Others6%0.00.51.0

65、1.52.02.53.00.00.51.01.52.02.53.0200212022Mainland ChinaKoreaTaiwanHong KongThailandEuropeUS(Monthly;MN)(Monthly;MN)Total Number of VisitorsSource:Japan Nati onal Touri sm Organi zati on,BoJ17 November 2022 8Gol dman SachsJapan Economi cs Anal ystCapex:Pent-Up Demand and Labor Short ages

66、t o Support Firm Invest ment Turni ng to capex,whi le the slowdown i n external demand wi ll generate some headwi nds,we thi nk capex wi ll remai n firm on the back of pent-up demand bui lt duri ng the pandemi c and demand i n response to labor shortages accompanyi ng economi c reopeni ng ami d dete

67、ri orati ng demographi cs.I n fact,FY2022 corporate plans call for the hi ghest capex demand si nce 1983 when data became avai lable(Exhi bi t 12 LHS).These are of course only plans and wi ll li kely be revi sed down ahead,especi ally among manufacturers,as external demand slows,and we thi nk FY2023

68、 plans wi ll be more cauti ous.Nonetheless,we thi nk i ntensi fyi ng labor shortages wi ll dri ve Japans capex goi ng forward.For example,looki ng at the two elements of the BOJs output gap,the capi tal i nput gap i s sti ll i n excess supply,whereas the labor i nput gap has already turned i nto exc

69、ess demand(Exhi bi t 13 LHS).One noteworthy aspect on thi s occasi on i s that whi le i n an economi c recovery phase the capi tal i nput gap normally tends to more qui ckly enter excess demand terri tory,the labor i nput gap i s now leadi ng the way.We expect excess demand for labor to remai n i n

70、place for now reflecti ng Japans deteri orati ng demographi c trend even after the reopeni ng boost wanes.Assessi ng contri buti ons to capex(yoy)from each of these two i nput gaps,the explanatory power for future capex vari ati ons i s larger for labor i nput gap than capi tal i nput gap(Exhi bi t

71、13 RHS).We thi nk the reason for thi s i s i ncreasi ng corporate demand for capex to address labor shortages,not only by i mprovi ng factory and office effici ency,but also by acti vely i ntroduci ng I CT equi pment and software.6 Software i nvestment dropped sharply duri ng FY2020 i n the group of

72、 non-manufacturi ng i ndustri es faced wi th severe labor shortages,such as lodgi ng and eati ng/dri nki ng 6Another non-negli gi ble techni cal factor i s that the BOJs capi tal i nput gap does not properly capture shortages of software and other i ntangi ble assets,due to data avai labi li ty i ss

73、ues.Thi s i s li kely to lower the explanatory power of the capi tal i nput gap for capex i n a bi d to address labor shortages.Exhibit 11:Inbound Spending Has t he Pot ent ial t o Exceed Pre-Pandemic Levels,But No Full-Scale Recovery Unt il 2024 Actual and Potential Inbound Spending by RegionOur Fo

74、recast of Inbound Spending0.00.51.01.52.02.53.00.00.51.01.52.02.53.0ChinaOther AsiaOther Regions2019 ActualEstimation Post FullReopening(JPY TN)(JPY TN)02019/32020/32021/32022/32023/3(JPY TN;Real SAAR)OurForecast(JPY TN;Real SAAR)2023/12Source:BoJ,Cabi net Of fice,Goldman Sachs Global Inv

75、estment Research17 November 2022 9Gol dman SachsJapan Economi cs Anal ystservi ces,as these i ndustri es tend to requi re more physi cal i nteracti on(Exhi bi t 12 RHS).However,i nvestment plans si nce FY2021 have reverted to bei ng markedly bulli sh.Si mi larly,i n the manufacturi ng i ndustry,comp

76、ani es are worki ng on i ni ti ati ves to create smart factori es,among others.Thi s goes beyond merely i mprovi ng producti vi ty i n producti on processes.I t equates to di gi tal transformati on desi gned to rei nvent the overall supply chai n,encompassi ng parts procurement,producti on,sales,and

77、 mai ntenance.Thi s trend i s li kely supported by manufacturers bei ng compelled to revamp i nventory systems due to supply chai n di srupti ons duri ng the pandemi c.Exhibit 12:Companies Have Robust Capex Demand,Soft ware in Part icular Capex Plan(BOJ Tankan)Software Investment(BOJ Tankan)-10-5051

78、01520-10-505101520ActualMarDecSepJunMarFY2017-20 AVGFY2019FY2020FY2022(YOY%)(YOY%)(Initial Plan)FY20260002001820202022Non-Manufacturers with SevereLabor ShortageOther Non-ManufacturersManufacturers(2012=100)(2012=100)CorporatePlanSource:BoJ,Data compi led

79、by Goldman Sachs Global Investment ResearchExhibit 13:Capex Responds St rongly t o Labor Short ages Output Gap and the Labor,Capital Input GapsContributions to Future Capex(YOY)-6-5-4-3-2-10123-6-5-4-3-2-032006200920021Output GapCapital Input GapLabor Input Gap(%)(%)Excess Dema

80、nd00001357911Labor Input GapOthers(%)(%)12QCapital Input GapSource:BoJ,Goldman Sachs Global Investment Research17 November 2022 10Gol dman SachsJapan Economi cs Anal ystInflat ion:Core Inflat ion t o Decelerat e,But Remain Above 2%During Most of 2023 The i nflati on wave has re

81、ached Japan after arri vi ng i n other developed economi es much sooner.Core CPI i nflati on(excludes fresh food)has ri sen,li fted mai nly by hi gher food and energy i nflati on,and exceeded 3%as of October 2022.Looki ng ahead,we thi nk core i nflati on wi ll peak at 2022 year-end,partly thanks to

82、government subsi di es(Exhi bi ts 14).Thereafter,we look for i nflati on to decelerate,but remai n above 2%duri ng most of 2023.The i mpact of the yen,whi ch has weakened rapi dly si nce spri ng 2022,has yet to run i ts course and our worki ng assumpti on calls for substanti al yen weakness up to 15

83、5/$over the 6-month hori zon.Also,whi le Japanese compani es have been passi ng on cost i nflati on to consumers,mai nly i n the food i ndustry thus far,the pass-through i s sti ll far lower than cost i nflati on.We therefore see further scope for pass-throughs.At the same ti me,however,we also see

84、the li mi t of pass-throughs,i n li ght of hi gh pri ce sensi ti vi ty among consumers ami d stagnated long-term wage trend.7 The i mpact of government subsi di es,whi ch cover not only energy(electri ci ty,gas and gasoli ne),but also nati onwi de travel support,on core CPI i nflati on i s li kely t

85、o be si gni ficant,but wi ll show up chi efly i n volati li ty more than the level of i nflati on(Exhi bi t 15).I n parti cular,electri ci ty subsi di es wi ll be i mplemented from January 2023 to counter electri ci ty pri ce hi kes by power compani es scheduled i n spri ng 2023.Whi le we thi nk the

86、 contri buti on to core CPI i nflati on after netti ng out these two effects i s only sli ghtly negati ve,the ti mi ng gap of both could create si gni ficant volati li ty.Li ke the BOJ,we thi nk hi gh i nflati on dri ven mai nly by cost-push factors i s not sustai nable.Sustai nable i nflati on arou

87、nd the BOJs 2%target would requi re a large and stable bump i n wages(di scussed later)and anchored i nflati on expectati on at relati vely hi gh levels among households.I nflati on expectati ons have already ri sen materi ally(Exhi bi t 16).However,gi ven the strong tendency for Japans i nflati on

88、expectati ons to co-move wi th actual i nflati on,expected i nflati on rates are li kely to fall once CPI i nflati on starts to decelerate si gni ficantly ahead as we expect.Accordi ngly,at thi s stage,we thi nk these condi ti ons are unli kely to be met for now.7See Naohi ko Baba,“Growth Strategy K

89、ey to Wage Growth/Pri ce Pass-Through,Rather Than Monetary Easi ng,”Japan Economi cc Analysi,Octover 14,2022.17 November 2022 11Gol dman SachsJapan Economi cs Anal ystExhibit 14:Inflat ion t o Decelerat e,Aft er Peaking at Year-End Core and New Core CPI ForecastsBreakdown of Core CPI Inflation-10123

90、-02220232024Core CPI:Our Forecast ConsensusNew Core CPI:Our ForecastOuf Forecast(YOY%)(YOY%)-3-2-101234-3-2-1012342021/12021/102022/72023/42024/12024/10Residual InflationTravel SubsidiesEnergyMobile Phone ChargeCore CPI Inflation(YOY%)(YOY%)Our ForecastCore excludes f resh f oo

91、d and new core excludes f resh f ood and energy.Source:Mi ni stry of Internal Af f ai rs and Communi cati ons,Goldman Sachs Global Investment ResearchExhibit 15:Government Subsidies To Raise Volat ilit y Core CPI Inflati on:Wi th or Wi thout Government Subsi di es Exhibit 16:Inflat ion Expect at ion

92、s Are Rising,But Sust ainabilit y Holds t he Key Ahead 022/12022/72023/12023/72024/12024/7With Subsidies(Our Forecast)Without Subsidies(YOY%)(YOY%)-4-3-2-3456789102006Q22010Q22014Q22018Q22022Q21Y Expected Inflation(LHS)CPI Inflation(excl.Imputed Rent;RHS)(YOY%)(YOY%)Consumption

93、 Tax Rate HikeSource:Mi ni stry of Internal Af f ai rs and Communi cati ons,Goldman Sachs Global Investment ResearchSource:BoJ,Mi ni stry of Internal Af f ai rs and Communi cati ons17 November 2022 12Gol dman SachsJapan Economi cs Anal ystWages:Height ened Market Int erest in FY2023 Shunto Market i

94、nterest i n FY2023 shunto has been ri si ng markedly,as the BOJ sees wage growth as a key factor for poli cy deci si ons.8 As noted above,core CPI i nflati on i s already well above the BOJs 2%target,at around 3%.However,BOJ Governor Kuroda has rei terated that macro wage growth of 3%or hi gher wi l

95、l be needed to attai n thi s target i n a sustai nable manner.I n thi s regard,there i s some confusi on among market parti ci pants,as the shunto wage hi ke,whi ch the market currently focuses on,i s not di rectly comparable to macro wage data.Below,we first clari fy the relati onshi p of the shunt

96、o wage wi th macro wage,whi ch here we speci fically refer to the monthly average wage per worker i n the Monthly Labor Survey(an establi shment survey,not household)by the Mi ni stry of Health Labor and Welfare,and then di scuss our outlook on the FY2023 wages.The shunto wage hi ke compri ses an“an

97、nual scheduled wage i ncrease”and a“base pay ri se,”(Exhi bi t 17 LHS),whi ch was 2.2%i n FY2022(1.57%for the former and 0.63%for the latter).The scheduled wage i ncrease i s a system of automati c i ncreases i n wage accordi ng to age,and i t certai nly means hi gher wages for i ndi vi dual workers

98、.However,for a broad economy,the total wage cost only changes wi th the worker age mi x,whi ch changes extremely slowly.I n pri nci ple,the i ncremental change i n the shunto scheduled wage i ncrease would provi de that addi ti onal accelerati on i n macro wage growth.That sai d,we find no si gni fi

99、cant stati sti cal relati onshi p to the shunto scheduled wage i ncrease and macro wage growth,and hence we can safely di sregard scheduled wage i ncrease i n consi deri ng macro wages.By contrast,the shunto base pay ri se effecti vely si gni fies uni form wage i ncreases across all workers,and an i

100、 ncrease i n the wage cost for a company as well as for the broad economy.Thi s i s hence reflected i n the macro basi c wage growth.The shunto base pay ri se i s hi ghly correlated wi th the pri or fiscal years base pay ri se,CPI i nflati on,and corporate sales.Based on these vari ables,we esti mat

101、e a shunto base pay ri se of 8See Naohi ko Baba and Yuri ko Tanaka,“How Large of a Shunto Wage HI ke I s Needed for 3%Macro Wage Growth?”Japan Economi cs Analyst,November 9,2022.Exhibit 17:While We See a Furt her Pick-Up in Base Pay Rise in FY2023 Shunt o,Overall Macro Wage Growt h Is Likely t o Rem

102、ain Largely Flat Shunto Wage HikeMacro Wage Growth-3-2-1012345-3-2-5201020152020Total Wage(Nominal)Basic Wage(Nominal)(YOY%)(YOY%)OurForecast05602005201020152020Base Pay RiseScheduled Wage IncreaseShunto Wage Hike(Rengo)(YOY%)Our Forecast for FY2023 Shunto

103、(YOY%)Source:Mi ni stry of Health,Labour and Welf are,JTUC-RENGO,Goldman Sachs Global Investment Research17 November 2022 13Gol dman SachsJapan Economi cs Anal yst0.9%i n FY2023,accelerati ng from 0.6%i n FY2022.Thi s reflects large contri buti ons from hi gh i nflati on and the strong base pay i nc

104、rease agreed i n FY2022,and i t would mark the largest base pay ri se si nce 1994.I f the shunto scheduled wage i ncrease i s the same as i n FY2022(1.57%),the headli ne shunto wage hi ke would equate to around 2.5%,the largest figure si nce 1998.Next,esti mati ng macro basi c wage growth from the s

105、hunto base pay ri se would generate macro basi c wage growth of 1.7%i n FY2023,an accelerati on from a proj ected 1.4%growth i n FY2022.Meanwhi le,we esti mate that the combi ned overti me and speci al wage growth would slow to 1.9%yoy i n FY2023 from a proj ected 3.2%i n FY2022,chi efly due to a sl

106、owdown i n corporate earni ngs and economi c acti vi ty.Combi ni ng these esti mates,our results i ndi cate an overall macro wage growth of 1.8%i n FY2023,essenti ally flat versus a proj ected 1.9%i n FY2022(Exhi bi t 17 RHS).Thi s i s well below the 3%wage growth that BOJ Governor Kuroda asserts i

107、s necessary for stable achi evement of the 2%i nflati on target.The next questi on i s how large of a shunto wage hi ke would be needed to achi eve the 3%macro wage growth.We address thi s questi on based on the followi ng steps.Wi th overti me wage and speci al wage growth esti mated from corporate

108、 earni ngs1.and real GDP growth as a gi ven,we map the relati onshi p between the overall wageand basi c wage growth i n Exhi bi t 18(LHS).Thi s shows that a basi c wage growth ofroughly 4%i s needed i n order to reach an overall wage growth of 3%.Based on the stable relati onshi p between past shun

109、to base pay ri ses and macro2.basi c wages,we esti mate that a shunto base pay ri se of 3.2%i s needed to reachbasi c wage growth of 4%(Exhi bi t 18 RHS).The last ti me base pay was rai sed thi smuch was i n 1991.I f the shunto scheduled wage i ncrease i s the same as i n FY2022(1.57%),a 4.8%shunto

110、wage hi ke wi ll be needed to attai n 3%macro overall wagegrowth(the hi ghest shunto wage hi ke si nce 1992).Exhibit 18:Not ably High Shunt o Base Pay Rise Is Necessary t o Achieve 3%Macro Wage Growt h Macro Wages:Overall Wage vs.Basic WageShunto Base Pay Rise vs.Macro Basic Wage-10Macr

111、o Basic Wage(YOY%)Overall Macro Wage(YOY%)-10Shunto Base Pay Rise(YOY%)Macro Basic Wage(YOY%)Source:Mi ni stry of Health,Labour and Welf are,JTUC-RENGO,Goldman Sachs Global Investment Research17 November 2022 14Gol dman SachsJapan Economi cs Anal ystI n any case,a hi gh shunto wage hi k

112、e close to the level 30 years ago would be needed for 3%macro wage growth.Gi ven the strong i nflati onary pressures and worker shortages due to economi c reopeni ng,we beli eve that ri sk to the 2023 wage si tuati on i s ti lted to the upsi de.However,at thi s stage,we thi nk even i f upsi de ri sk

113、 materi ali zes,i t would not be enough to attai n stable macro wage growth of 3%duri ng 2023 for the followi ng reasons.Fi rst,basi c wages are very much vi ewed as fixed costs,especi ally i n Japan,and once rai sed,i t i s challengi ng to lower them,barri ng an unforeseeable strong,sustai ned shoc

114、k such as the Japanese financi al cri si s i n the late 1990s.Accordi ngly,as long as compani es long-term growth expectati ons conti nue to langui sh,compani es li kely tend to hesi tate to rai se basi c wages si gni ficantly(Exhi bi t 19).9 Second,macro wage growth(not adj usted for composi ti on)

115、could be constrai ned i f a shortage of labor leads to a sharp i ncrease i n non-permanent employees,whose wage levels are well below those of permanent workers.Thi rd,wi th the i nput cost burden wei ghi ng down busi nesses,condi ti ons may not be conduci ve to large wage i ncreases,especi ally at

116、SMEs,gi ven they typi cally find i t di fficult to pass on costs i n sales pri ces.9See Naohi ko Baba,“Growth Strategy Key to Wage Growth/Pri ce Pass-Through,Rather Than Monetary Easi ng,”Japan Economi cs Analyst,October 14,2022.Exhibit 19:Meaningful Improvement in Growt h Prospect s Among Companies

117、 Is Indispensable for St ruct urally Higher Basic Wages Fi ve-Year Expected Growth Rates and Basi c Wage 080520002005201020152020Macro Basic Wage(LHS)5Y Real Expected Growth(RHS)5Y Nominal Expected Growth(RHS)(YOY%)(YOY%)5-year expected growth rates are based on li sted c

118、ompani es taken f rom Annual Survey of Corporate Behavi or(Cabi net Of fice).Source:MHLW,Cabi net Of fice17 November 2022 15Gol dman SachsJapan Economi cs Anal ystEconomic Policy:Current Fiscal and Monet ary Policy Mix t o Be Maint ained Amid Concerns About Global Economic Slowdown Si nce mi d-2021,

119、the Ki shi da admi ni strati ons basi c stance on the poli cy mi x has been to address sharply ri si ng i mport i nflati on and the weak yen vi a fiscal poli cy and currency market i nterventi on,whi le at the same ti me the admi ni strati on has pushed for a monetary poli cy that mai ntai ns the lo

120、w i nterest rate envi ronment to support proacti ve fiscal expendi ture.10 Wi thi n thi s context,the admi ni strati on has begun i nterveni ng i n the forex market si nce September,and announced another fiscal package i n October,whi le the BOJ i s sti cki ng steadfastly to i ts accommodati ve mone

121、tary poli cy stance.The Ki shi da admi ni strati on has also been stressi ng i ts concerns about a global economi c slowdown and i ts potenti al negati ve i mpact on the Japanese economy,whi ch i s sti ll i n the recovery phase from the pandemi c.Unti l these concerns have largely abated,we expect t

122、he Ki shi da admi ni strati on wi ll conti nue to encourage the BOJ to sustai n the low i nterest rate envi ronment.Rapi d depreci ati on of the yen has li kely come as a surpri se to the Ki shi da admi ni strati on and the BOJ.However,both have expressed concern about the possi ble adverse i mpact

123、on the economy(especi ally SMEs and households wi th mortgages)from any move to address the weak yen by hi ki ng rates,gi ven thi s would li kely requi re a substanti al i ncrease i n poli cy rates.Accordi ngly,we expect the admi ni strati on wi ll mai ntai n i ts stance of wai ti ng for the Fed pi

124、vot,whi le buyi ng ti me by occasi onally i nterveni ng i n the currency market as necessary.We See Limited Impact of New Fiscal Package,Compared to Headl ine Size Below,we look at the new fiscal package announced on October 28.Central government spendi ng(36 tn)has ballooned to ri val the pandemi c

125、-related package,wi th a second FY2022 supplementary budget of 29 tn(5.4%of GDP).We note that thi s i ncrease i n the headli ne figure followed the rapi dly falli ng publi c approval rati ng for the Ki shi da admi ni strati on(Exhi bi ts 20).The government has posi ti oned energy subsi di es(electri

126、 ci ty,gas,and gasoli ne),as the most appeali ng i tems i n the package,as noted above.Among other measures,the government plans to establi sh a new system to support pregnant women,and provi de materni ty support subsi di es equi valent to 100,000 i n total.I n addi ti on,i t plans to broaden i ts

127、re-trai ni ng support program i n a bi d to i ncrease wages.PM Ki shi da sai d that the government wi ll i nj ect around 1 tn i nto thi s program over a 5-year peri od.Our esti mate of the economi c i mpact of thi s package remai ns provi si onal owi ng to the many unclear detai ls.However,we thi nk

128、 i t i s li kely to be only around 1%of GDP(total over the 2-3 year peri od),far smaller than the governments esti mate of 4.6%,for the followi ng reasons.Unused porti on i n the FY2020-FY2021 budgets amounted to 20%of the total1.amounts,and we assume the government wi ll be unable to spend a si gni

129、 ficant10See Naohi ko Baba,“Collaborati on Between Government and BOJ,wi th Subtle Changes Seen i n Both,”Japan Vi ews,October 28,2022.17 November 2022 16Gol dman SachsJapan Economi cs Anal ystporti on of the latest package as well.Many measures i ni ti ally proposed for the FY2023 mai n budget were

130、 front-loaded i n2.the latest package.The package i ncludes a reserve budget of around 5 tn.3.The bulk of the subsi di es porti on tends to be saved rather than spent.4.The package i ncludes non-negli gi ble contri buti ons to vari ous funds whose future5.spendi ng plan i s unknown.11See Naohi ko Ba

131、ba“Japan Vi ews:Q&A on BOJ Under New Leadershi p:Our Preli mi nary Thoughts,”Japan Vi ews,October 13,2022Exhibit 20:Kishida Administ rat ions Approval Rat ing Approaching 30%Mark 203040506070802030405060708020000212022(%)(%)PM AbePM SugaSub 30%Critical ZoneSub 40%War

132、ning ZonePM KishidaSource:Real Poli ti cs Japan,Asahi Shi mbun,Other medi a reports,Data compi led by Goldman Sachs Global Investment ResearchBOJ Set for Leadership Change-No Easy Pat h Toward Normalizat ion Next,we turn to the BOJ.Governor Haruhi ko Kurodas second term i s set to expi re i n Apri l

133、 2023,and wi ll see a shi ft to new leadershi p(two deputy governors terms wi ll expi re i n March).11 Two names,both of whom hai l from the BOJ,have been frequently menti oned i n the medi a as leadi ng candi dates to be the next governor:current Deputy Governor Masayoshi Amami ya and former Deputy

134、 Governor Hi roshi Nakaso(September 25,Nikkei).Mr.Amami ya has been deeply i nvolved i n formulati ng monetary poli cy i ncludi ng the negati ve i nterest rate poli cy(NI RP)and yi eld curve control(YCC)as Governor Kurodas ri ght-hand man for nearly 10 years.Mr.Nakaso also assi sted i n desi gni ng

135、poli cy duri ng Governor Kurodas first term,and i s known as an i nternati onali st wi th deep knowledge of financi al market functi ons and financi al systems.Mr.Amamiya has made few comments expressi ng hi s own thoughts about monetary poli cy gi ven hi s posi ti on as an i ncumbent deputy governo

136、r.However,wi th regard to an exi t strategy from current monetary easi ng,he noted at a press conference on July 29 that the BOJ i s always consi deri ng thi s i n terms of speci fic poli cy tools and as a way of communi cati ng wi th the markets i n the event that the BOJ i s finally on track to ac

137、hi eve i ts 2%i nflati on target.17 November 2022 17Gol dman SachsJapan Economi cs Anal ystMeanwhi le,Mr.Nakaso has sai d that the BOJ has played a more than si gni ficant role i n efforts to pull Japan out of deflati on,and that Abenomi cs was overly dependent on the BOJ(September 28,Bloomberg).Rel

138、ated to thi s,wi th other central banks i n Europe and the US hi ki ng rates,he has stated that the BOJ needs to take heed of the cumulati ve ri sk from conti nui ng wi th powerful easi ng(September 28,Asahi Shimbun).He has also poi nted out that as the BOJ has come to hold roughly half of all outst

139、andi ng JGBs,market functi oni ng has deteri orated and thi s needs to be restored.We beli eve the return to a normali zed monetary easi ng poli cy after a decade of unprecedented easi ng wi ll be the first pri ori ty for the next governor,and the market vi ew i s also li kely to be leani ng toward

140、a hawki sh shi ft.However,assumi ng the 2%i nflati on target wi ll be mai ntai ned and gi ven the Ki shi da admi ni strati ons concerns about global economi c slowdown,we thi nk the probabi li ty of an expli ci t rate hi ke duri ng 2023 i s well below 50%.Thi s could also be true for 2024,gi ven a n

141、arrow wi ndow for all the condi ti ons we thi nk necessary(di scussed below)to be met for an expli ci t rate hi ke.Here,by an expli ci t rate hi ke we mean(1)shorteni ng the maturi ty of the long-term yi eld target to 5 years from 10 years,(2)rai si ng the 10-year yi eld target,whi le mai ntai ni ng

142、 YCC,and/or(3)termi nati ng the NI RP.Below,we di scuss the condi ti ons that would be requi red for thi s to occur.(1)Wage growth woul d need to approach 3%to attain stabl e 2%inflationAs di scussed above,Governor Kuroda has rei terated that macro wage growth would need to ri se beyond 3%for the BO

143、J to seri ously consi der a rate hi ke.Whi le the new leadershi p may not be so focused on the 3%figure,gi ven thi s has now become a wi dely accepted condi ti on,we expect i t wi ll remai n a si gni ficant hurdle to any move toward an expli ci t rate hi ke.(2)Prospects of domestic and gl obal econo

144、my woul d need to improveEven i f there was no clear causal relati onshi p,a si tuati on where the economy falls i nto a downturn shortly after the poli cy rate i s hi ked could be labeled a fai lure of monetary poli cy.I n thi s regard,the BOJ li kely remembers that soon after termi nati ng i ts ze

145、ro i nterest rate poli cy i n August 2000 the subsequent collapse of the I T bubble preci pi tated rapi d deteri orati on i n domesti c and overseas economi es,forci ng the BOJ to adopt quanti tati ve easi ng i n March 2001.(3)Stabil ity of gl obal interest rates woul d al so be keyFor example,i f t

146、he maturi ty of the long-term yi eld target i s shortened duri ng a peri od of ri si ng global i nterest rates,i t could i nvi te overshooti ng i n Japans long-term yi elds.Furthermore,even i f the YCC framework was mai ntai ned and the 10-year yi eld target was shi fted up,the yi eld would qui ckly

147、 move up to the new upper li mi t,putti ng pressure on the BOJ to do more.I n thi s regard,the ri sk of termi nati ng the NI RP i s li kely to be far smaller(di scussed below).(4)The Kishida administration woul d need to give its consent17 November 2022 18Gol dman SachsJapan Economi cs Anal ystThi s

148、 i s closely related to the poi nt(2)above.Also even after concerns about global economi c slowdown are di spelled,the BOJ would need to wai t unti l the Ki shi da admi ni strati on gi ve i ts consent.However,Adjust ment s Are Possible/Swing Fact or Is Terminat ion of NIRP in t he Name of Enhancing

149、Sust ainabilit y Meanwhi le,we thi nk adj ustments to the BOJs easi ng system i n 2023 are more li kely than an expli ci t rate hi ke,perhaps as a consequence of the poli cy revi ew of the past decade under Governor Kuroda.Possi ble opti ons would be revising forward guidance and widening the tol er

150、abl e band for the 10-year yiel d.Revi si ng forward gui dance represents the lowest hurdle and our baseli ne scenari o duri ng 2023,as i t i s li nked to the pandemi c si tuati on,and the pandemi c-related fundi ng support program for SMEs i s set to expi re at the end of March 2023.Speci fically,w

151、e assume the BOJ wi ll drop or revi se the part stati ng that i t expects“poli cy rates to remai n at the present or lower levels.”I n contrast,wi deni ng the tolerable band for 10-year yi elds duri ng 2023 i s a close call,i n our vi ew.At thi s stage,we tentati vely posi ti on i t as our ri sk sce

152、nari o,gi ven that i ts li keli hood could change meani ngfully dependi ng on the next governor.I n addi ti on,we thi nk wi deni ng of the 10-year band could be vi ewed as a means of maki ng the easi ng poli cy more sustai nable rather than ti ghteni ng i t,wi th three possi ble j usti ficati ons as

153、 follows.(1)Limits the side eff ects for the financial system from yiel ds being hel d atul tra-l ow l evel s for a protracted periodBy maki ng full use of unli mi ted fixed-rate purchase operati ons to defend the upper bound of 10-year yi eld of 5bp,the BOJ has suppressed i t far below our esti mat

154、e of i ts fai r value(Exhi bi ts 21,22).Agai nst thi s backdrop,banks and other financi al i nsti tuti ons have been obli ged to heavi ly resort to i nvestment i n forei gn bonds and i nvestment funds.However,vari ous i ssues are already comi ng to li ght i n terms of valuati on losses on these i nv

155、estments.(2)Improves JGB market functioningWi th the BOJs ri gorous efforts to mai ntai n YCC,the JGB market functi oni ng has deteri orated notably,accordi ng to the BOJ survey.The BOJ has already wi dened i ts 10-year band wi th thi s purpose i n mi nd.Governor Kuroda has noted that wi deni ng the

156、band i s i n effect the same as rai si ng poli cy rates.However,the room for i nterpretati onappears to be relati vely large,gi ven that one of the potenti al candi dates for the governorposi ti on,Mr.Nakaso,has argued that JGB market functi oni ng needs to be restored,asmenti oned above.(3)Reduces

157、the ampl ifying eff ect on forex rate fluctuations by capping 10-yearyiel dsWhi le the US and other developed economi es have entered rapi d rate hi ke cycles i n 2022 i n order to curb i nflati on,the BOJ has engaged i n a resolute defense of YCC.As a consequence,the US-Japan 10-year yi eld di ffer

158、enti al has wi dened,leadi ng to a rapi d weakeni ng of the JPY vs.the USD,whi ch eventually tri ggered the first 17 November 2022 19Gol dman SachsJapan Economi cs Anal ystUSD-selli ng/JPY-buyi ng i nterventi on i n 24 years i n September.Another potenti al opti on i s el iminating the NIRP in the n

159、ame of enhancing sustainabil ity of the easing system.Di fficulty remai ns i n thi s opti on,as the short-term poli cy rate i s the most tradi ti onal focus of monetary poli cy,and also as the BOJ has emphasi zed that the most effecti ve maturi ty to lower yi elds to support the economy i s the shor

160、t-term zone up to around 12 months.That sai d,wi th long-term yi elds volati le worldwi de,thi s measure has the advantage of bei ng relati vely easy to i mplement.As a result,thi s opti on needs to be kept i n mi nd,i n our vi ew,should the new BOJ leadershi p be looki ng to act i n some way duri n

161、g 2023.I f thi s i s the case,we thi nk the BOJ would posi ti on i t as a measure to enhance sustai nabi li ty of the easi ng system,not as a rate hi ke i n a tradi ti onal sense.Naohiko Baba,Tomohiro Ota and Yuriko TanakaExhibit 21:BOJ Uses Fixed-Rat e Operat ions t o Defend YCC 10-Year JGB Yi el d

162、 and Fi xed-Rate Operati onsExhibit 22:BOJ Suppressing 10-Year Yield Far Below it s Fair Value 10-Year JGB Yi el d vs.Fai r Val ue0.150.200.250.300.00.51.01.52.02.52022/42022/62022/82022/1010Y Yield(RHS)Fixed Rate Operation(JPY tn)(%)Daily Fixed-Rate OperationsUpper Bound (RHS)Purchase Amount of JGB

163、s by the BOJ(LHS)-0.4-0.20.00.20.40.60.81.0-0.4-0.20.00.20.40.60.81.0200192021Fair Value10Y JGB Yield(%)(%)Source:BOJ,DatastreamSource:Bloomberg,Goldman Sachs Global Investment Research17 November 2022 20Gol dman SachsJapan Economi cs Anal ystJapan Mai n Economi c Forecasts Calendar Year

164、Fiscal Year 20212022E2023E2024E2025E2026E20212022E2023E2024E2025E2026EReal GDP(YOY%)1.6 1.5 1.3 1.4 1.4 1.0 2.31.71.21.51.21.0 Consumption1.3 3.0 1.3 0.8 0.9 0.6 2.63.00.90.90.80.6 Capex-0.9 2.0 4.2 2.2 2.2 2.7 0.63.93.42.12.42.8 Housing Investment-2.0-4.3 0.5 1.9 2.0 0.6-1.7-4.01.32.11.70.2 Private

165、 Inventories(contribution)-0.2 0.4-0.1-0.1 0.0 0.0 0.10.2-0.10.00.00.0 Export11.8 4.6 4.2 6.6 5.6 3.8 12.44.84.46.94.93.8 Import5.1 7.9 5.4 4.7 4.6 4.2 7.17.84.74.84.54.2 Government Spending2.1 1.6 0.7 0.7 0.7 0.7 2.01.40.60.70.70.7 Public Fixed Investment-2.7-6.7 2.5 1.9 1.3 1.9-7.5-2.22.21.81.22.1

166、 Net Exports(cont.)1.1-0.6-0.2 0.3 0.2-0.1 0.9-0.6-0.1 0.4 0.1-0.1 Private Domestic Demand (cont.)0.4 2.2 1.3 0.8 0.9 0.8 1.52.21.00.80.90.8 Public Demand(cont.)0.3 0.0 0.3 0.2 0.2 0.2 0.00.10.20.20.20.3Nominal GDP(YOY%)0.81.32.63.73.02.41.31.93.03.42.92.3Industrial Production(YOY%)5.61.22.04.43.84.

167、75.72.21.84.93.85.0Core CPI(YOY%)-0.22.22.51.41.11.10.12.72.41.11.11.2New Core CPI(YOY%)-0.51.02.41.10.81.1-0.81.92.10.90.91.2Unemployment Rate(%)2.82.62.52.42.22.22.82.62.52.42.22.2Current Account(tn)21.68.81.67.810.615.020.35.53.37.611.614.8BOJ Policy Rates(End of Period;%)Short-Term Target-0.10-0

168、.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.1010-Year Target0.000.000.000.000.000.000.000.000.000.000.000.00USD/JPY(End of Period)115.1145.0140.0140.0115.0105.0121.4155.0140.0140.0115.0105.00EUR/JPY(End of Period)130.0143.6147.0147.0126.5120.8134.7145.7147.0147.0126.5120.751Q2Q3Q4QE1QE2QE3QE4

169、QE1QE2QE3QE4QEReal GDP(QOQ Annualized%)0.24.6-1.22.91.01.01.11.11.41.61.61.5 Consumption1.35.11.12.50.80.70.50.50.80.91.01.1 Capex-0.59.96.34.03.53.53.02.02.02.02.02.0 Housing Investment-5.2-7.4-1.72.01.01.51.51.52.02.02.52.5 Private Inventories(contribution)2.0-0.9-0.30.30.0-0.1-0.1-0.10.00.00.00.0

170、 Export4.67.27.92.52.04.05.56.47.07.57.06.5 Import15.13.322.61.03.04.54.24.25.05.05.05.0 Government Spending1.63.40.00.60.60.70.70.70.70.70.70.7 Public Fixed Investment-11.54.24.92.02.02.02.02.02.01.81.81.8 Net Exports(cont.)-1.80.7-2.60.3-0.2-0.10.20.40.40.50.40.3 Private Domestic Demand (cont.)2.4

171、3.01.22.41.00.80.70.50.80.90.91.0 Public Demand(cont.)-0.30.90.20.20.20.20.20.20.20.20.20.2Real GDP(YOY%)0.61.71.81.61.80.91.51.11.21.31.41.5 Consumption2.03.14.32.52.31.31.10.60.60.70.80.9 Capex-1.00.44.14.95.94.33.53.02.62.22.02.0 Housing Investment-2.9-6.1-5.0-3.1-1.60.71.51.41.61.72.02.2 Export4

172、.53.05.65.54.94.13.54.55.76.67.07.0 Import7.33.510.610.27.17.43.24.04.54.64.85.0 Government Spending2.12.10.91.41.10.50.60.70.70.70.70.7 Public Fixed Investment-12.6-8.9-4.3-0.33.32.72.02.02.01.91.91.8Nominal GDP(YOY%)0.11.31.32.42.52.63.12.34.34.53.62.7Industrial Production(YOY%)-0.7-3.64.34.93.04.

173、80.00.02.55.15.15.1Core CPI(YOY%)0.62.12.73.52.52.82.62.02.31.70.80.9New Core CPI(YOY%)-0.90.91.52.52.62.72.31.91.61.20.90.8Unemployment Rate(%)2.72.62.62.62.52.52.52.52.42.42.42.3Current Account(tn)4.92.42.5-1.01.6-0.22.9-2.73.32.35.1-2.7BOJ Policy Rates(End of Period;%)Short-Term Target-0.10-0.10-

174、0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.10-0.1010-Year Target0.000.000.000.000.000.000.000.000.000.000.000.00USD/JPY(End of Period)121.4135.7144.7145.0155.0155.0145.0140.0140.0140.0140.0140.0EUR/JPY(End of Period)134.7142.1143.3143.6145.7150.4145.0147.0147.0147.0147.0147.0202420222023Note:Both Cor

175、e CPI and New Core CPI i nclude i mpacts f rom consumpti on tax hi ke,f ree educati on and mobi le phone charge reducti on.Source:Goldman Sachs Global Investment Research17 November 2022 21Gol dman SachsJapan Economi cs Anal ystDi scl osure Appendi x Reg AC We,Naohi ko Baba,Tomohi ro Ota and Yuri ko

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