Outlook Beyond the Planned Consumption Tax Hike(Sep 2013)

◆Economic outlook reviewed: In light of the second preliminary Apr-Jun GDP release (Cabinet Office), we have reviewed our economic growth outlook. We now forecast real GDP growth of +3.0% y/y for FY13 (previous forecast: +3.0%) and +1.2% for FY14 (+1.2%). We have assumed the formation of the FY13 supplementary budget of around Y3 trillion (new spending basis).

◆Main scenario—Japan’s economy to continue growing: After hitting bottom in November 2012, Japan’s economy has entered a recovery phase. We believe it will continue to expand steadily. Economic policies of the Abe administration (so-called “Abenomics”) represent an appropriate set of policies with the potential of jump-starting the revival of the Japanese economy and monetary policy measures in particular are yielding marked results. We anticipate that the economy will continue to expand, supported by (1) the expansion of the US economy, (2) persistent reconstruction demand related to the 2011 Great East Japan Earthquake and the formation of a large-scale supplementary budget, and (3) the ongoing yen depreciation and the ascent in stock prices accompanying the Bank of Japan’s bold monetary easing. When we compare the current recovery with past recoveries, it is distinguished by a robust household sector that is being supported by a recovery in consumer confidence from a rising stock market. While the improvement in the income environment, exports, and capex was somewhat slow in relative terms, these categories are not faring all that poorly compared to past recoveries in Japan and the US. With regard to criticisms against Abenomics such as (1) it will have an adverse impact on the economy if long-term interest rates rise and (2) employee income will fail to increase as inflation progresses, and living standards will fall, we believe these criticisms have little basis. Going forward, the Abe administration will need to actively engage in measures such as (1) maintaining fiscal discipline through fundamental reforms to the social insurance system and (2) strengthening comprehensive growth strategies through deregulation and the reduction of the effective corporate tax rate.

◆Four risk factors: Risks that will need to be kept in mind regarding the Japanese economy are: (1) turbulence in emerging economies, (2) China’s shadow banking problem, (3) a reigniting of the European sovereign debt crisis, and (4) a surge in crude oil prices stemming from geopolitical risk.