Will Abenomics Rehabilitate Japan's Economy?(No.176)

Japan to see real GDP growth of +0.9% in FY12, +2.7% in FY13, and +0.4% in FY14, nominal GDP growth of +0.1%, +2.1%, and +1.5%

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  • Mitsumaru Kumagai
  • Masahiko Hashimoto
  • Tsutomu Saito
  • Shotaro Kugo

Summary

Economic outlook revised: In light of the first preliminary Oct-Dec 2012 GDP report (Cabinet Office), we have revised our economic growth outlook for FY12-14. We had provisionally revised our outlook upward on 18 January in view of the formation of the Abe administration, but now forecast real GDP growth of +0.9% y/y for FY12 (provisional forecast as of 18 January: +1.3%; forecast before the formation of the Abe administration: +1.0%), +2.7% for FY13 (+2.2% and +1.1%, respectively), and +0.4% for FY14 (provisional forecast as of 18 January: +0.3%). Forecast revisions were made by taking a broad account of such factors as the formation of a large-scale supplementary budget, and the ongoing depreciation of the yen/ascent of share prices accompanying the Bank of Japan (BOJ)’s adoption of inflation targeting.


Will Abenomics Rehabilitate Japan’s Economy?: In our current outlook, we provide a multifaceted examination of the economic policies of the Abe administration (so-called Abenomics). Abenomics prioritizes three thrusts: (1) bold monetary policies, (2) flexible fiscal policies, and (3) growth strategies to stimulate private sector investment. We believe that Abenomics has the potential of sparking the revival of Japan’s economy and that its basic direction is set on the right course. In this report, we examine four concerns that Japanese citizens have regarding Abenomics. First, there is the risk that the government failing to maintain fiscal discipline will invite the triple blow of falling JGB prices, falling stock prices, and a falling yen. Second, criticism is being widely voiced that medium- to long-term improvements in the nation’s economic foundation and structural reforms are currently insufficient. Third, there is concern that employee income will not grow as inflation progresses. And fourth, there is also worry that Abenomics will benefit large companies but small companies will be left out. Our analysis of these four concerns led us to the conclusion that the first two are the most worrisome. That is to say, the key to the future success of Abenomics will be (1) selective investment in public works projects while maintaining fiscal discipline and (2) the implementation of policies to improve the foundations of Japan’s economy, such as deregulation, participation in the Trans-Pacific Strategic Economic Partnership Agreement (TPP), and the reduction of the effective tax rate borne by corporations.


Main scenario for Japan’s economy: Japan’s economy slipped into recession after peaking in March 2012. The economy now appears to have hit bottom in November 2012 and to have bottomed out. It is expected to continue expanding, supported by (1) the recovery of the US and Chinese economies, (2) the continuation of reconstruction demand and the formation of a large-scale supplementary budget, and (3) the ongoing depreciation of the yen/ascent of share prices accompanying BOJ’s adoption of inflation targeting. With regard to the last, we believe that a correction of the yen’s excessive appreciation is currently underway in foreign exchange markets. Also, a comparison with the real economy suggests that stock prices are potentially still undervalued at current levels.


Risks facing Japan’s economy: Risks that will need to be borne in mind regarding Japan’s economy are: (1) any deepening of the European sovereign debt crisis, reflecting likely political instability in Italy and Spain, (2) any worsening of Japan-China relations, (3) the US fiscal issue, and (4) a surge in crude oil prices stemming from geopolitical risk.


BOJ monetary policy: The BOJ adopting inflation targeting in January 2013 can be applauded to some degree. The BOJ, however, will need to ease monetary policy further, such as by actively purchasing risk assets (ETFs and other such assets). Another issue the BOJ will likely need to address is improving communication with the markets.


【Our assumptions】

◆Public works spending will grow +14.7% in FY12, +12.3% in FY13, and –15.8% in FY14; the consumption tax rate will be increased in April 2014


◆Average exchange rate of Y82.9/$ in FY12, Y95.0/$ in both FY13 and FY14


◆US real GDP growth of +2.0% in CY13 and +2.6% in CY14

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