The macro environment
The macro impediments affecting the Japanese economy are:
• Political instability following former prime minister Shinzo Abe’s assassination
• Ongoing monetary easing program by Bank of Japan (BoJ) targeting a stable 2% inflation rate
• Weakening yen
• Rising import prices and, consequently, consumer prices
• Trade deficit due to a surge in imports, and
• Low wages.
Review of 2022
Can Prime Minister Fumio Kishida overcome the post-election crisis?
After a landslide victory in the July 2022 Upper House elections, Prime Minister Fumio Kishida’s cabinet approval rate has gradually declined due to the political instability following former prime minister Shinzo Abe’s assassination. The Japanese public, media and opposition parties have focused on the investigation of the Unification Church and its relationships within the governing Liberal Democrat Party.
Daishiro Yamagiwa, the minister responsible for economic and fiscal policy, new capitalism and economic revitalization, had to step down after his unsatisfactory responses to questioning by the Opposition. Kishida’s plans to create double asset-based income through a new form of capitalism might be affected by this unexpected cabinet change.
BoJ’s long-awaited ‘2% inflation target’ with weakened yen
As I wrote in a previous report, one of the main assumptions beyond ‘Abenomics’, Japan’s monetary expansion policy to revive the economy, is that “a weakened yen will boost the global demand for Japanese products, such as motor vehicles, machinery and consumer electronics. An increase in exports will save those struggling industries and make them more profitable. Those profits will eventually be reflected to households as pay rises”.
In 2022, the yen hit the lowest level in 30 years (1 US$ = JPY145–150), helping the BoJ surpass its inflation target of 2%. The weakened yen showed its immediate impact as record trade deficits in the first half of fiscal 2022 reached JPY11.01 trillion (US$78.5 billion), due to high energy and raw material costs. Long-term positive results might be expected with export-led growth and surging tourism revenues after more than two years of COVID-19-related border closures. However, the shipments to the US, Japan’s main US dollar export partner, might decrease if the US economy goes into a recession.
On the other hand, the Japanese government showed its determination not to stand still against speculative exchange rate fluctuations and carried out record currency intervention spending of JPY6.35 trillion (US$45.28 billion) between the 29th September and the 27th October.
Effects on households and individuals
Due to the weakening yen and the ongoing crisis in Ukraine, raw material costs for food and energy have increased significantly, which has been reflected in rising consumer prices for electricity, gas and wheat flour, among other items. Kishida recently announced a US$200 billion stimulus plan to reduce households’ utility costs by approximately US$35 per month. The redistribution of wealth and efforts to increase household income continue to be important policy topics of the Japanese government.
Remarkable Islamic finance achievements by Japanese institutions in 2022
Japanese financial institutions showed strong interest in both institutional and retail Islamic finance markets. For example, SMBC International Bank jointly led Al Rajhi Bank’s commodity Murabahah facility, with the total amount exceeding US$1 billion. In the retail field, major Japanese financial institutions have continued to participate in Southeast Asia’s lucrative Islamic finance markets. AEON Credit Service’s Islamic digital bank in Malaysia, MUFG’s MUFG Bank (Malaysia), Sumitomo Mitsui Banking Corporation (SMBC)’s SMBC Malaysia and BTPN Syariah in Indonesia enjoy strong support from their parent companies in Japan.
Preview of 2023
Opportunities for Islamic finance industry in 2023
Having profitable relationships with the Islamic world continues to be a strategic priority for Japan. In particular, energy procurement from the Middle East has become more important due to the crisis in Ukraine and deteriorating relations with Russia. Therefore, large-scale capital investment projects in energy and infrastructure fields as well as sustainable energy and raw material procurement will continue to be Japan’s main concerns.
Two initiatives I recommend are: Japan Bank for International Cooperation (JBIC)’s investments and Kishida’s commitments to invest in Africa. Further involvement by JBIC and other public and private institutions in hydrogen and fuel ammonia energy supply chain construction is expected in 2023. For JBIC’s strategic action plan, please refer to the Fourth Medium-term Business Plan (FY2021–FY2023).
At the Tokyo International Conference on African Development or TICAD8, organized in Tunisia in August 2022, Kishida made the commitment to invest US$30 billion as the sum of public and private financial contributions over the next three years in Africa, creating another opportunity for the Islamic finance industry.
Participating in Africa’s development as a partner has been Japan’s strategic priority for decades. However, the lack of human resources to source, develop and execute projects is a barrier for Japan in becoming a more proactive player in the region. Islamic finance institutions can collaborate with Japanese counterparties to achieve the ambitious US$30 billion investment target set by Kishida.
Conclusion
The Japanese economy is experiencing drastic changes, such as energy supply chain reconstruction. The government must take leadership in this change while collaborating with private institutions. The Islamic finance industry can take advantage of opportunities to partner with the Japanese government and public institutions in large-scale infrastructure and energy projects in Islamic countries, as well as development projects in Africa.
Serdar Basara is the president of Japan Islamic Finance. He can be contacted at [email protected].