Assessment of Abenomics (May 2013)

◆Economic outlook revised: In light of the first preliminary Jan-Mar GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +3.1% y/y for FY13 (previous forecast: +2.7%) and +0.7% for FY14 (+0.4%). The upgrades were made taking into account such factors as the improvement in the export environment which is benefitting from ongoing depreciation of the yen accompanying the Bank of Japan (BOJ)’s monetary easing, and the increase in personal spending accompanying the ascent of share prices.

◆Assessment of Abenomics: In this report, we provide an assessment of the economic policies of the Abe administration (so-called Abenomics). Abenomics consists of three thrusts (priority areas): (1) bold monetary policies, (2) flexible fiscal policies, and (3) growth strategies to stimulate private sector investment. We believe that Abenomics represents an appropriate set of economic policies with the potential of sparking the revival of Japan's economy. In particular, monetary policies are steadily yielding results. In this report, we examine the prospects for achieving the BOJ’s inflation target of 2%. This target will be hard to achieve merely by reducing the GDP gap, and a significant increase in the expected inflation rate will be essential. A quantitative analysis of the economic impact of Abenomics based on Daiwa’s short-term macroeconomic model indicates that the positive effects coming from a weaker yen and higher stock prices will not be impaired as long as the long-term interest rate does not rise substantially. Hence, current favorable economic conditions will be sustained for the time being. On the other hand, the Japanese government will need to address the medium- to long-term fiscal deficit problem with more resolve than before.

◆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. It is expected to continue expanding, supported by (1) the recovery of the US and Chinese economies, (2) the continuation of reconstruction demand and a large-scale supplementary budget, and (3) the ongoing depreciation of the yen and the ascent of stock prices accompanying the BOJ’s bold monetary easing. With regard to the last, we anticipate that the yen will gradually weaken against the US dollar. Also, in comparison to the real economy, it still cannot be said that stock prices are overvalued at their current levels.

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