Macro Insights: Japan’s sluggish GDP growth and Kazuo Ueda nominated as the new BOJ chief

Disappointing Q4 GDP growth, but recovery likely ahead

Japan’s 4Q 2022 GDP rebounded as expected from the previous quarter’s contraction, but the pace of growth was below forecast at 0.2% QoQ, 0.6% QoQ SAAR (vs. 0.5% QoQ, 2.0% QoQ SAAR expected). Growth for Q3 was also revised lower, adding to further concerns that the recovery in the Japanese economy remains sub-par. Q4 growth had a reopening boost but that was offset by the impact of stronger inflation and the decline in business spending. Stronger yen and a decline in commodity prices also helped to trim the ballooning import bill, but concerns of a global demand slowdown continue to question the export outlook for Japan.

However, the global growth rhetoric has continued to strengthen since the start of the year as Europe is likely to skirt a recession and China’s reopening adds optimism. The recent bumper US jobs report for January further fuelled calls of a no-landing. This could help to cushion Japan’s export growth, and aid the likely pickup in services sector growth as tourism demand continues to pick up with China’s reopening.

Kazuo Ueda nominated as the next BOJ governor

An official nomination of Kazuo Ueda as the next Bank of Japan governor went ahead with no surprises today. BOJ Executive director Shinichi Uchida and former finance ministry official Ryozo Himino were also nominated as the deputy governors.

With the announcement having come in advance on Friday (Feb 10), market had already started to price in some hawkish expectations as the most dovish choice to be the next BOJ governor Amamiya refused to take the spot. However, in BOJ’s policy, no one is hawkish. Either you’re Kuroda-level dovish, or you’re dovish. Ueda is an academic who served as BOJ policy board member two decades ago during 1998-2005. He hasn’t been in touch with the BOJ policymaking in the last 17 years, and will at best be slow if he was to consider policy normalization. The softer growth in Q4 also suggests that taking off monetary stimulus off the table in Japan has to be a careful process. This lack of policy colour on Ueda still limits room for any appreciation of the Japanese yen, especially considering the global scenario of rising yields.

Still, his previous comments suggest that Ueda is not in favor of long-term yield curve control or gradually raising the ceiling and creating waves of speculation. Markets are also looking for a change in how the BOJ communicates with the markets, after Kuroda’s lack of policy direction triggered waves of speculation.

The focal point for Japan watchers now moves to February 24 – the day parliamentary hearings begin. Investors will be again key to assess Ueda’s views on the economy and policy. If the new governor is seen to be favoring changing the inflation accord with the government to target 2% inflation target to a longer time frame rather than “the earliest date possible”, this could signal that less accommodation will be added to the markets going forward. That will be a contrasting start to Kuroda ten years ago, when Kuroda unveiled his massive bond buying plans.

Japan equities look promising

Japanese equities have a number of tailwinds playing out at the same time. Domestic relaxation of pandemic restrictions, along with China’s reopening, bring a potential wave of consumption rebound. Range-bound oil prices have reduced input price pressures, while a still-weak yen keeps export prices competitive. Wage pressures may pick up, but are unlikely to be substantial. In fact, Japan corporates remain flush with cash and a likely slow exit from the YCC policy also means that this environment will sustain. Meanwhile, Japan equities remain attractive from a valuation standpoint as well. See below a chart comparing the P/E of MSCI Japan to that of MSCI World. 

However, risks remain from a stronger-than-expected wage growth in the US that can continue to drive up Fed’s hawkishness and global yields higher, weighing on yen and this eroding gains for foreign investors. A faster-than-expected tightening in Japan could also dampen the recovery in the Japanese economy and weigh on Japan equities.