Global risk in 2023

By Rodrigo González, Tokyo director

EIU recently released its risk outlook report for 2023, which analyses the political, military, environmental and economic scenarios that could lead to even slower growth, or worse, trigger a global recession. We believe that world-wrecking crises such as a full-force invasion of Taiwan or a more lethal variant of covid are unlikely. But extreme weather events and social unrest fueled by high global inflation remain, as per our experts calculations, very probable.

The image below illustrates what these risk scenarios look like:

One of these potential scenarios particularly concerns Japan: monetary tightening. Despite the massive drop in the yen’s exchange rate this year, our analysts do not foresee the BoJ raising interest rates even as far in as 2025. Major central banks are rapidly raising interest rates to try to tame rising inflation across most of the world (we assume that global inflation will stand at nearly 10% in 2023). These measures are fuelling a sharp increase in long-term interest rates, raising borrowing costs – except in Japan (see image below).

In general, a prolonged rise in inflation could prompt central banks to maintain aggressive policies that would undermine household purchasing power amid high energy and commodities prices. Amid other destabilising factors (for example the war in Ukraine, supply-chain disruptions, the strength of the US dollar and China’s zerocovid policy), this situation could trigger a global recession. The BoJ has emphatically reasserted that zero-interest rates are non-negotiable in the foreseeable future, despite the vulnerability of the currency to monetary policy changes by other central banks, especially the Fed.

The question for Japan is whether an interest rate pegged to zero is sustainable in the long-term. Japan’s unique example of just how indebted a country can become, while retaining its credibility, is still going even as the world enters a period of economic insecurity (the recent rescue package approved in October will be financed with more debt). Furthermore, if the government indeed resorts to raising taxes, then the prospect of investing in Japan will become less appealing, further dampening the demand for yen and forcing ordinary citizens to tighten their belts yet another notch.

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