Japan's Economy: Monthly Outlook(Jun 2017)

◆In light of the 2nd 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 (+1.5% in the previous forecast), and +1.1% in comparison with the previous year for FY18 (+1.1% in the previous forecast). There is no change in our estimates.

◆We expect Japan’s economy to slow gradually after accelerated growth throughout FY2017, supported by (1) favorable overseas demand, and (2) inventory investment. We expect Japan’s economy to then move toward balanced growth in FY2018 driven equally by domestic and overseas demand thanks to (1) genuine improvement in the employment environment, and (2) investment in improving productivity.

◆Japan’s labor market is now near the saturation point including for regular employees. The labor market is tight since the working age population is declining and there is little room for the labor participation rate to grow. The countdown to wage inflation has begun, and it is very likely that this will lead in turn to an expansion in household consumption, and investment in means of dealing with the shortage of manpower, including labor-saving and rationalization, research & development, and mergers & acquisitions.

◆However, caution is required regarding overseas demand. In the US, the Fed has already implemented multiple interest rate hikes, and it has announced that reduction of the balance sheet will begin within the year. This is expected to bring downward pressure on not only the US economy, but emerging nations as well. According to DIR simulation, the US exit strategy is expected to influence global economic growth as follows: -0.04% in 2017, -0.16% in 2018, and -0.31% in 2019.