Outlook for Japan's Economy in 2017

Moderate recovery expected for Japan’s economy, but downside risk due to external factors remains

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  • Mitsumaru Kumagai
  • Satoshi Osanai
  • Keisuke Okamoto
  • Shunsuke Kobayashi
  • Tsutomu Saito
  • Kazuma Maeda
  • Makoto Tanaka

Summary

Economic outlook revised: In light of the 2nd preliminary Jul-Sep 2016 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +1.3% in comparison with the previous year for FY16 (+1.1% in the previous forecast), and +0.9% in comparison with the previous year for FY17 (+0.9% in the previous forecast). Japan’s economy is expected to recover gradually due to underlying support from the following domestic factors: (1) growth in real wages, (2) low price of crude oil and improvement in terms of trade, and (3) implementation of an economic stimulus package. However, there is downside risk for Japan’s economy, which could arise from the ripple effects of Donald Trump’s winning of the recent US presidential election. These are mainly (1) yen appreciation, (2) stock price lows, and (3) world economic slowdown. (For details see Japan’s Economic Outlook No. 191, Update (Summary), December 14, 2016, by Mitsumaru Kumagai.)


Overseas investment behaviors of Japanese corporations, and domestic ripple effect: With both Japan’s potential growth rate and expected growth rate at a low level, corporations are beginning to look for growth opportunities in overseas markets. An analysis of the investment behaviors of domestic corporations and their overseas subsidiaries reveals the tendency to take the practical approach and decrease the amount of domestic capex while rerouting resources to Asia and North America. Meanwhile, the divergence between real GDP and real GNI has been widening of late. In addition to improving terms of trade, this is due to backflow of earnings from overseas subsidiaries to domestic parent companies accompanying increased overseas investments. Based on actual value in FY2015, the positive effect of backflow of overseas profits is estimated to have brought a 3.2 trillion yen improvement in employee compensation and an approximately 2.4 trillion yen increase in nominal personal consumption.

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