Will The Great Rotation Continue?(Mar 2017)

◆Economic outlook revised: In light of the 2nd preliminary Oct-Dec 2016 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +1.4% in comparison with the previous year for FY16 (+1.3% in the previous forecast), +1.4% in comparison with the previous year for FY17 (+1.3% in the previous forecast), and +1.1% in comparison with the previous year for FY18 (+1.1% in the previous forecast). 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 Update (Summary), March 9, 2017, by Mitsumaru Kumagai.)

◆Will The Great Rotation continue?: Currently, global money flows are shifting from bonds to stocks. This is known as The Great Rotation. This is due to the long-term interest rate hikes which the FRB began in December of 2015. Another reason that stock prices have been on the way up is that the global economy has recently been continuing its recovery. The general understanding of economists is that The Great Rotation ends when the economy declines and the stock market enters an adjustment phase. In our considerations regarding whether or not The Great Rotation will continue, we examine three major judgment criteria (merkmal). These are (1) Whether the growth rate of the global economy will be revised upwards, (2) Whether the price of copper is expected to rise, and (3) Whether the US currency authorities adopt a weak dollar policy.

◆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.