Signs of Economic Recovery Strengthen(Jan 2014)

◆Signs of economic recovery strengthen: Japan’s economy shows stronger signs of recovery. The government’s monthly economic report issued on January 17 used the expression “recovering at a moderate pace” for the first time in eight years. We also see continued expansion for the Japanese economy for the following reasons: (1) increases in exports based on the US economic recovery, (2) ongoing depreciation of the yen and the rise in stock prices supported by the BOJ’s monetary easing, and (3) economic stimulus measures to offset the effects of the consumption tax hike. The growth rate of real GDP will be +2.5% y/y for FY 2013 and +1.0% for FY 2014. (For further detail see “Japan’s Economic Outlook No. 179 (Updated), by Mitsumaru Kumagai et al, 10 Dec 2013).

◆Four risks facing Japan’s economy: 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. It is worth noting that the first is closely related to the second and third. In the past, advanced economies led by the US drove emerging economies. However, a decoupling is currently occurring—advanced economies are performing well but emerging economies are stagnating. We believe that this decoupling is occurring for three reasons: (1) the dwindling amount of loans from European financial institutions to emerging economies in light of the European debt crisis, (2) the sluggishness of the Chinese economy, and (3) concerns that money will be taken out of emerging economies based on worries that the Fed will adopt a hasty exit from quantitative easing. We anticipate that a further deterioration of emerging economies will be avoided as the US economy continues to expand. Nevertheless, we think the state and the future direction of the Chinese economy will continue to require close monitoring.