Japan's Economy: Monthly Outlook (Oct 2017)

◆The season for politics has arrived. The House of Representatives election is now the major focus in Japan. With election surveys predicting that Abe’s LDP will retain a majority, we do not expect any major changes in economic or fiscal policy for some time to come, other than a change in how the consumption tax is applied in the future.

◆Other major events attracting interest around the same time as Japan’s House of Representatives election is the meeting of the National Congress of the Communist Party in China, and the naming of a new chairman to the US FRB. The following effects of both these factors are of vital importance in predicting the future of the global economy: first there is the question of how long the appreciation of the Chinese Yuan and acceleration of China’s economic growth (both of which originally developed as side effects of suppressing capital outflow) will last. Then there is the question of whether the newly appointed FRB chairman will continue the current direction of monetary policy, whose purpose has been to keep overheating of the asset market under control as opposed to a policy which would be dependent only on economic variables such as employment and prices.

◆Despite a number of unknown factors remaining, the global economy managed to perform well in 2017, manifesting acceleration of economic growth. Behind acceleration of growth are (1) inventories, centering on the US, have recently recovered and have moved into the inventory accumulation phase, (2) expansionary fiscal policy has come into effect centering on the EU (the pace of austerity policy has slowed), and (3) acceleration of the Chinese economy ahead of the meeting of the National Congress of the Communist Party this fall. However, the possibility that these factors may begin to lose their influence in 2018 and beyond is unavoidable.

◆As in the case of the global economy, the Japanese economy has also been moving ahead with factors producing accelerated economic growth which have a limited shelf life. One factor is the inventory cycle, which echoes that of the US, while the other is replacement demand for durables. Replacement demand for durables is currently driving the acceleration of Japan’s economic growth, yet at the same time it may also be a factor in suppressing consumption of goods other than durables. To put it in another way, once replacement demand has run its course, the economic growth rate will likely slow overall, while at the same time, consumption of goods other than durables may then head toward recovery