Japan Surprises 2023

Ten twists and turns that could make for an interesting Year of the Rabbit

Surprises are the spice of life that make us perk up and challenge our baseline assumptions. And what better time to sprinkle them on than the start of a new year? Of course, there will always be a surprise or two, but here is my annual list of possible surprises that could add up to a heaping load for Japan in 2023. Whichever may come to be, I wish a happy, healthy, and prosperous new year to all!

1. Growth of Japan’s gross domestic product (GDP) outperforms that of the United States, Europe … and China.

It has been more than 30 years since Japan’s economy last outperformed that of the United States and the Europe Union, so it would be a real surprise if Japan climbs back up this year to become the top G7 growth performer.

Chances are better than ever. While both the United States and the EU poised to be pulled towards recession by the combined effects of rising interest rates and high inflation, Japan has kept interest rates stable and boosted fiscal spending while private business investment has been accelerating. Thus, outgrowing the United States and the EU should be easy. And if, as I suspect, Japan’s consumers open their wallets after three years of austerity, the country’s GDP could even outperform China’s in 2023.

2. The Bank of Japan (BOJ) maintains zero rates, but the Ministry of Finance insists on raising taxes.

By April, the BOJ will have a new governor. Many expect the new leader will, perhaps sooner rather than later, end Japan’s extraordinary monetary policy. Of course, the BOJ will only change policy and step on the monetary brakes if the economy needs slowing down. A real shock would be if the Ministry of Finance insists that the policy braking must come via tighter fiscal policy in general and higher taxes in particular. In Japan, fiscal policy priorities tend to dominate monetary ones, no matter who runs the central bank.

3. Keidanren promotes pay-for-performance compensation.

For the past six years, prime ministers have been lobbying Japanese business leaders to increase wages. A positive surprise would be if the country’s biggest business lobby, Keidanren, agrees not only to a three-percent hike in base pay for 2023 but, more importantly, endorses a push for a structural change in Japanese employment culture: merit-based compensation where possible.

Business leaders agreeing to a simple rise in base pay for workers would be good for one year only. Business leaders pushing for reform of employee incentives, however, would create credible prospects for multi-year, productivity-led growth.

4. Prime Minister Fumio Kishida loses a vote of no confidence, calls a snap election.

In politics, Japan is a bastion of stability. In many ways, Kishida appears so much better off than most of his democratically elected peers. His Liberal Democratic Party (LDP) has a de facto supermajority in the Diet and he faces no national election until 2025. A surprise would be if Kishida were forced to call a snap election in 2023. Typically, prime ministers exercise their power to dissolve the Diet for one of three reasons:

• They are riding high in the polls and think they can gain even more seats for the LDP
• They are threatened by a revolt from within and need to keep party members in line
• They want to minimize losses as the opposition begins to capitalize on growing voter dissatisfaction with LDP rule

For Kishida, the time of maximum pressure is poised to be right after he hosts global leaders at the Hiroshima G7 Summit in mid-May. If this event does not deliver the expected bounce in his popularity, he may well be forced to take dramatic action to keep his party in line.

5. Young LDP leaders promote the abolition of the inheritance tax.

Over the coming 15 years, an estimated ¥500–750 trillion of household wealth will become unstuck due to inheritance. That’s 1–1.5 times GDP. Much of this will be used to pay down the national debt.

At more than 50 percent, Japan’s inheritance tax rates are famously high. While this makes the accountants happy, it does not create growth nor does it drive investments in future prosperity. A long-overdue, positive surprise would be if Japan’s next-generation leaders started to demand reform of the inheritance tax.

Japan could take a clue from the otherwise much-admired Nordics. Recently, Sweden cut its inheritance tax to zero and Denmark dropped its to 15 percent—policies promoting ways to channel the accumulated wealth of the baby boomers into future investments. Now that’s worthy of being called New Capitalism.

6. Japan wins major global defense contract.

Japanese national security policy made a clear turn in 2022, and the defense budget will be more than doubled, from one to two percent of GDP. A real surprise would be if, on top of increased defense spending, Japan won a major global defense contract. The greater the evidence that Japan’s spending on national security is actually an investment in global competitiveness, the happier taxpayers and investors will be.

7. Japan corporate governance goes global, Japanese on Wall Street boards.

Corporate governance reform continues to be on everyone’s agenda, yet cross-national corporate board representation has basically been a one-way street. There are now just over 70 non-Japanese serving on the boards of Japanese listed companies—a healthy if small increase from last year’s 60—but you can still count on one hand the number of Japanese nationals serving on the boards of US listed companies. There’s Oki Matsumoto at Mastercard Inc., Jun Makihara at Philip Morris International Inc., Hiromichi Mizuno at Tesla, Inc., and Yu Serizawa at the Renault Group. A righting of this imbalance would be a real surprise.

Japanese corporate governance reform has gathered considerable momentum over the past decade. In my view, a good way to judge whether true progress has been made is by whether (or when) US companies begin to appoint Japanese to their boards. At the very least, it would prove that Japan’s leaders have become more global, more open-minded, and are now capable of demonstrating to global peers how Japan-style corporate stewardship can be very relevant when building a better, more sustainable, and inclusive world. Perhaps an even bigger surprise would be US CEOs actually listening to their advice.

8. Japan develops a working quantum computer.

While the world is obsessed with speculating on whether the United States or China will win the race for technological supremacy, Japan has the potential to become a surprise champ in at least one big category: quantum computing. Specifically, Toshiba’s engineering team is, by many accounts, consistently on the cutting edge of all things quantum computing, be it the manufacturing of a physical machine or the software needed to control it. Success in creating a scalable quantum computing solution would certainly mark a welcome return of the former crown jewel of Japan’s engineering prowess.

9. China starts an Asian currency war.

My biggest worry for a negative surprise in 2023 is China being forced to dramatically devalue its currency. Why? Unemployment is rising, the economy is slowing and, since last summer, China has been trying to stimulate growth by easing both monetary and fiscal policy. If China’s economy does not respond and does not begin to accelerate by late spring, pressure will rise to use currency devaluation to help kick-start growth. China starting a currency war in Asia would force a dramatic disruption of the prospects for prosperity in Japan and around the world.

10. Kyoto receives more Michelin stars than Paris.

Since 2007, Tokyo has been the world’s culinary supercity, consistently beating Paris in the annual Michelin star rankings. The 2022 tally was 263 stars for Tokyo versus 152 for Paris. Less known is that Kyoto has been gaining on Paris and, after receiving 129 stars in 2022, could well surpass the French capital in 2023 for a well-deserved Japan one-two finish in the gourmet world cup. Of course, the real surprise would be if this double defeat were to trigger a change in Parisian waiters’ attitudes. How do you say omotenashi in French?