Downside Risk Remains for Japanese Economy Due to Global Economic Factors (May 2016)

◆Downside risk remains for the Japanese economy due to global economic factors: In light of the 1st preliminary Jan-Mar 2016 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +0.8% in comparison with the previous year for FY16 (+0.9% in the previous forecast), and -0.1% in comparison with the previous year for FY17 (-0.1% in the previous forecast). Japan’s economy remains in a lull, but we expect it to recover gradually due to the following domestic factors: (1) growth in real wages, (2) low price of crude oil and improvement in terms of trade, and (3) the supplementary budget. However, caution is needed regarding downside risk in the global economy, especially that of China. (More detail on this subject can be found in Japan’s Economic Outlook No. 189 , June 15, 2016, by Mitsumaru Kumagai.)

◆Risk factors facing Japan’s economy:Risk factors for the Japanese economy are: (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 strong yen / weak stock market situation brought on by risk-off behavior of investors due to geopolitical risk, and (4) The threat of UK exiting the EU (Brexit), and uncertainty regarding Greece. 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 1,000 tril 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.