Japan's economy expected to move toward recovery, but care should be taken regarding four risk factors(Dec 2014)

◆Economic outlook revised: In light of the 2^nd preliminary Jul-Sep GDP release, we have revised our economic growth outlook. We now forecast real GDP growth of -0.5% in comparison with the previous year for FY14 (-0.5% in the previous forecast) and +1.8% in comparison with the previous year for FY15 (+1.8% in the previous forecast). (For further detail see “Japan’s Economic Outlook No. 183 Update (Summary)” by Mitsumaru Kumagai, Dec. 12, 2014). Prime Minister Shinzo Abe’s announcement of the postponement of the additional consumption tax hike is expected to push the FY2015 GDP growth rate up an additional +0.53%pt. However, for the time being extreme care will have to be taken regarding risks associated with the postponement of the consumption tax hike. We call these the Triple Weaknesses – a weak bond market, weak yen, and weak stock market.

◆Main economic scenario for Japan: Japan’s economy is now seen as having entered a period of decline since having peaked in January 2014. However, there is a good possibility that this will have been short-term. We expect Japan’s economy to gradually recover due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) The gradual firming up of exports centering on the US.

◆Four risk factors facing Japan’s economy: Risk factors for the Japanese economy are: (1) The Triple Weaknesses – a weak bond market, weak yen, and weak stock market stemming from the postponement of the additional consumption tax hike, (2) China’s shadow banking problem, (3) tumult in the economies of emerging nations in response to the US exit strategy, and (4) a worldwide decline in stock values due to geopolitical risk.