Three Issues Regarding Abenomics(June 2013)

◆Economic outlook reviewed: In light of the second preliminary Jan-Mar GDP release (Cabinet Office), we have reviewed our economic growth outlook. We now forecast real GDP growth of +3.1% y/y for FY13 (previous forecast: +3.1%) and +0.7% for FY14 (+0.7%).

◆Three issues regarding Abenomics: In this report, we examine three issues regarding Abenomics. First, there is the risk that the government failing to maintain fiscal discipline will invite the triple blow of falling JGB prices, falling stock prices, and a falling yen. Second, criticism is being widely voiced that medium- to long-term improvements in the nation’s economic foundation and structural reforms are currently insufficient. Third, there is concern that employee income will not grow as inflation progresses. Thus, going forward, the Abe administration will need to actively engage in: (1) the maintenance of fiscal discipline, such as by making fundamental reforms to the social insurance system, (2) the strengthening of comprehensive growth strategies, such as through deregulation, participation in the Trans-Pacific Partnership (TPP), and the reduction of the effective tax rate borne by corporations, and (3) the achievement of higher employee income where the pain is shared among the government, business, and labor.

◆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 Bank of Japan (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.