Economy on recovery path partly reflecting Abenomics(Mar 2013)

◆Economic outlook revised: In light of the second preliminary Oct-Dec 2012 GDP report(Cabinet Office), we have revised our economic growth outlook for FY12-14. We now forecast real GDP growth of +1.0% y/y for FY12(previous forecast: +0.9%), +2.7% for FY13 (+2.7%),and +0.4% for FY14(+0.4%).

◆Main scenario for Japan’s economy: Japan’s economy slipped into recession after peaking in March 2012. It now appears to have hit bottom in November 2012 and to have bottomed out,and is expected to continue expanding, supported by (1) the recovery of the US and Chinese economies, (2) the continuation of reconstruction demand and the formation of a large-scale supplementary budget, and (3) the ongoing depreciation of the yen/ascent of share prices accompanying the Bank of Japan(BOJ)’s adoption of inflation targeting. With regard to the last,we believe that a correction of the yen’s excessive appreciation is currently underway in foreign exchange markets. Also, a comparison with the real economy suggests that stock prices are potentially still undervalued at current levels.

◆Risks facing Japan’s economy: Risks that will need to be borne in mind regarding Japan’s economy are: (1) any deepening of the European sovereign debt crisis, reflecting likely political instability in Italy and Spain, (2) any worsening of Japan-China relations, (3) the US fiscal issue, and (4) a surge in crude oil prices stemming from geopolitical risk.