Japan's Economic Outlook for 2016(Dec 2015)

◆Economic outlook revised: In light of the 2^nd preliminary Jul-Sep 2015 GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +1.0% in comparison with the previous year for FY15 (+0.8% in the previous forecast) and +1.5% in comparison with the previous year for FY16 (+1.5% in the previous forecast). Japan’s economy entered a temporary lull in 2015, but we expect it to move toward a gradual recovery during the year 2016 due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) A gradual comeback in exports centering on the US. (For details see Japan’s Economic Outlook No. 187 Update (Summary), December 11, 2015, by Mitsumaru Kumagai.)

◆Japan’s main economic scenario: Judging from the performance of major demand components in the GDP statistics, there is a possibility that Japan’s economy has officially fallen into a recession. However, examination of three major judgment criteria (“merkmal”) suggests that Japan’s economy is still in a temporary lull. In either case, the adjustment phase in Japan’s economy is expected to be both short-term and fairly minor. We see Japan moving toward a moderate recovery during the year 2016.

◆Risk factors facing Japan’s economy: (1) The downward swing of China’s economy, (2) Tumult in the economies of emerging nations in response to the US exit strategy, (3) A worldwide decline in stock values due to geopolitical risk, (4) The worsening of the Eurozone economy, and (5) The Triple Weaknesses – a weak bond market, weak yen, and weak stock market due to loss of fiscal discipline. Our outlook for China’s economy is optimistic in the short-term and pessimistic in the mid to long-term. Looking at China’s economic situation in a somewhat reductive way, the fact is that China’s government holds treasury funds totaling between 600 to 800 tril yen with which it is standing up to over 1 quadrillion yen in excessive lending and over 400 tril yen in excess capital stock. China is expected to be able to avoid the bottom falling out of its economy for a little while, but in the mid to long-term, there is risk of a massive capital stock adjustment.