Gradual move toward recovery seen for Japan's economy(Aug 2014)

◆Outlook Revised: In light of the second preliminary Apr-Jun GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +0.7% in comparison with the previous year for FY14 (+0.7% 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. 182 Update (Summary), (September 8, 2014), by Mitsumaru Kumagai et al.) Japan’s economy declined temporarily in the Apr-Jun 2014 period due to the effects of the increase in consumption tax, but is expected to get back on track and gradually move toward recovery during the Jul-Sep period. Japan’s economy is gaining support from the following positive factors: (1) The negative factors associated with the increase in consumption tax have pretty much played themselves out, and (2) Firming up of exports due mostly to the US economic recovery. Risks that will need to be kept in mind regarding the Japanese economy are: (1) stagnant personal consumption due to the decline in real income, (2) China’s shadow banking problem, (3) a surge in crude oil prices stemming from geopolitical risk, and (4) tumult in the economies of emerging nations in response to the US exit strategy.

◆Will exports get back on track?: Japan’s exports are expected to gradually regain ground supported by the cyclical recovery in the US economy. However, of the 11.5 trillion yen trade deficit Japan carried as of 2013, approximately 7 trillion yen is due to the hollowing out effect, while another 4 trillion yen is attributed to the increase in imported oil and LNG after most of the country’s nuclear power plants were shut down. Considering factors like these, Japan’s trade balance will likely be bleeding red ink for some time to come.