Japan's Economy: Monthly Outlook(May 2017)

◆In light of the 1st preliminary Jan-Mar 2017 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +1.5% in comparison with the previous year for FY17 (+1.4% in the previous forecast), +1.1% in comparison with the previous year for FY18 (+1.1% in the previous forecast). Japan’s economy is expected to see growth accelerate throughout FY2017 due to the following factors: (1) favorable overseas demand, and (2) support provided by inventory investment.

◆However, accelerated growth supported by these positive factors could prove to be only temporary. According to our main economic scenario, we expect Japan’s growth rate to slow gradually in FY2018. On the other hand, Japan’s economy is expected to move toward balanced growth in FY2018 driven equally by both domestic and overseas demand thanks to (1) genuine improvement in the employment environment, and (2) growth driven by investments in improving productivity.

◆Personal consumption is expected to continue moderate growth throughout the period covered by our outlook (FY2017 – FY2018). However, the driving force behind growth will differ for each of those years. The major factor behind growth in consumption in FY2017 will be the falling away of negative factors which inhibited growth in the past. On the other hand, in FY2018, genuine improvement in the employment environment affecting even regular employees is expected to result from the worsening manpower shortage. This is also expected to become the driving force behind growth in consumption.

◆Capital expenditure is also expected to continue moderate expansion. Investment in various means of dealing with the worsening manpower shortage is expected to strengthen. Capex is expected to gain support from investments in labor-saving and rationalization associated with improving productivity, as well as research & development aiming toward improving earnings, and investments in upgrading and renovation.