Trump's Administration Takes Shape: So What next?(Feb 2017)

◆Economic outlook revised: In light of the 1st preliminary Oct-Dec 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 (+1.3% in the previous forecast), and +1.3% in comparison with the previous year for FY17 (+0.9% in the previous forecast). We have also produced an estimate for FY18 for the first time, at +1.1% in comparison with the previous year. Japan’s economy is expected to shift into a path of balanced growth in the future due to the following factors: (1) a comeback for exports, (2) progress in inventory adjustment, and (3) a recovery in domestic demand supported by a steady undertone in consumption and capex. (For details see Japan’s Economic Outlook No. 192 (Summary), February 24, 2017, by Mitsumaru Kumagai.)

◆Trump’s Administration Takes Shape: So What next?: The Trump administration was formed in January 2017 and immediately began testing the waters in three areas as follows (1) shifting to protectionist policies in trade, (2) immigration policy, and (3) currency strategy. Our conclusions regarding the possible effects of Trump’s policy focus on the following three points. First, if the only big change the US makes in policy is to withdraw from NAFTA, there would be only minor effects on Japan’s economy. But if adjustments are made to the border tax, this could cause Japan’s real GDP to decline as much as -0.4%. Secondly, if two or three million illegal immigrants are forcibly returned to their countries of origin, a decline in worker population in the US would result, creating the risk of a decline in US potential GDP anywhere from -0.7% to -1.1%. Thirdly, though there is a very good possibility that the dollar will remain strong for the short-term, in the mid to long-term, President Trump could go all the way with a weak dollar policy once fears of inflation subside.

◆Risk factors facing Japan’s economy: Risk factors for the Japanese economy are: (1) The policies of President Donald Trump, (2) The downward swing of China’s economy, (3) Tumult in the economies of emerging nations in response to the US exit strategy, (4) Risk-off behavior of investors due to geopolitical risk and country risk, and (5) Negotiations regarding the UK’s withdrawal from the EU (Brexit), and deleveraging at EU financial institutions.