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Medium Term Economic Forecast Economic Forecast (48th / FY2021-FY2035)

Japan’s economy after Russian invasion of Ukraine

- Soaring resource prices, risk of zero growth in the mid-2020s
- Tighter sanctions may cause negative growth
- DX effective for both countering high resource prices and for improving productivity in medical and long-term care



<<Key takeaways>>
  1. Baseline scenario--The COVID-19 pandemic will be contained in FY2022. The impact of higher prices following a surge in resource prices due to the Russian invasion of Ukraine (crude oil price of $110/bbl assumed for FY2022) and the decline in global economic growth rates will be concentrated in the early-2020s. Japan’s economic growth will fall to zero in the mid-2020s (Figure 1). Operating profit for Japanese companies will remain sluggish, failing to return to record-high levels of FY2018 before FY2035. Circumstances will be particularly difficult for energy-intensive industries. Japan’s goods and services trade balance is likely to remain in deficit, and the FY2035 current account surplus will be half of its average level in the 2010s. Decline in the population, and its aging, will accelerate in the 2030s, making negative economic growth the norm.
  2. Risk scenario--Inhumane acts during the invasion of Ukraine may intensify, leading to the escalation of economic sanctions against Russia by the West, Japan, and other countries, and resource prices may soar further in FY2023 (oil price at $140/bbl). Hence, growth rate in the 2020s could be pushed down further, resulting in negative growth in FY2024‒2027. The current account will remain in deficit until FY2026, and corporate operating profit will be even lower than in the baseline scenario. Moreover, it will become increasingly difficult for Japan to finance its massive issuance of government bonds domestically, and fiscal flexibility will be reduced. Additionally, living standards will decline. There are concerns about whether Japanese society will be able to tolerate such a situation.
  3. DX can improve productivity in the medical and long-term care sector, making a direct impact on raising the GDP level--As the population ages further and the labor force population begins to decline, the Japanese economy will not grow without improvements in labor productivity. Intangible assets such as knowledge and information are becoming more important, but human capital investment and organizational reforms are not strategic to absorb new knowledge and technology and apply them to production activities in Japan. Moreover, DX has had little progress. The promotion of DX will improve human resource efficiency in providing medical care and streamline the complex tasks essential to long-term care provision such as liaison, coordination and record-keeping; the increase in the number of medical and long-term care workers needed by 2035 will be limited to about one-third. It will be also possible to allocate human resources to more productive sectors, raising the level of Japan’s real GDP by about 2%.

Fig. Entrenched zero or negative growth in the mid-2020s after the invasion of Ukraine

Source: Cabinet Office “Annual Report on National Accounts” forecasted by JCER after FY2021.

 Many innocent civilians, including children, have become casualties in the Russian invasion of Ukraine. The number of refugees inside and outside of Ukraine is estimated to be as high as a quarter of the country’s population. The Japan Center for Economic Research (JCER) expresses its condolences to the victims and sincerely hopes for the early withdrawal of Russian troops, ceasefire and peace.

 Tatsuo Kobayashi (Principal Economist), Kyoko Deguchi (Principal Economist), Katsuaki Ochiai (Specially Appointed Fellow), Takashi Miyazaki (Senior Economist), Tetsuaki Takano (Senior Economist), Akira Tanaka (Senior Economist), Trainee Economists: Ryo Izutani, and Daisuke Maruyama.



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- Soaring resource prices, risk of zero growth in the mid-2020s
- Tighter sanctions may cause negative growth
- DX effective for both countering high resource prices and for improving productivity in medical and long-term care

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