Challenges facing Abenomics(Jun 2014)

◆Economic outlook revised: We revised our Jan-Mar 2014 outlook for Japan’s economy based on the 2^nd preliminary GDP estimate. We now forecast real GDP growth of +1.1% in comparison with the previous year for FY14 (+1.0% in the previous forecast) and +1.5% in comparison with the previous year for FY15 (+1.5% in the previous forecast). (See Japan’s Economic Outlook No. 181 Update (Summary), (June 23, 2014), by Mitsumaru Kumagai et al.). Japan’s economy is expected to decline temporarily in the Apr-Jun 2014 period due to the effects of the increase in consumption tax, but then to get back on track and head toward recovery during the Jul-Sep period. Japan’s economy is expected to firm up in the near future due to the following positive factors: (1) The negative factors associated with the increase in consumption tax are believed to be limited, and (2) Firming up of exports due to US economic recovery.

◆Challenges facing Abenomics: As we have mentioned before on a number of occasions, the biggest challenges faced by Abenomics are (1) maintaining fiscal restraint, and (2) strengthening its growth strategy. The arguments supporting this outlook focus especially on the following themes.

(1)Speed up the move from savings to investment: The effects of Abenomics are expected to lead to inflation, and the move from savings to investment must be encouraged.

(2)Halt the decline in birthrate: Halt the decline in the birthrate, which has plagued Japan for many years now, by aggressively promoting more contribution from women in the workforce.