Japan's Economic Outlook (Quarterly)
In this report we examine four major issues facing Japan's economy: (1) The need to increase wages, (2) BOJ's price stability target, (3) The current account deficit, and (4) Economic disparity(No. 180 Update)[Summary]

Japan to see real GDP growth of +2.2% in FY13, +1.0% in FY14, and +1.5% in FY15, with nominal GDP growth of +1.9%, +2.6%, and +2.5%

March 18, 2014

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

Main Points

Main economic scenario for Japan: In light of the second preliminary Oct-Dec GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +2.2% y/y for FY13 (previous forecast: +2.3%) and +1.0% for FY14 (+1.0%). Our new outlook for FY15 is +1.5% (unchanged from previous forecast). Japan’s economy is expected to continue expanding in the future for the following reasons: (1) Firming up of exports due to US economic recovery, (2) Ongoing depreciation of the yen and stock price highs in response to BOJ’s monetary easing, and (3) Effects of government’s economic policy accompanying consumption tax hike.

Four major issues facing Japan’s economy: In this report we examine four major issues facing Japan’s economy: (1) The need to increase wages, (2) BOJ’s price stability target, (3) The current account deficit, and (4) Economic disparity.

Issue (1) The need to increase wages: Will the government’s attempt to increase wages as a means of stimulating a virtuous circle work? First, an international comparison of real wages demonstrates that wages are stagnating in Japan not because labor’s share is low, but because there are issues involving labor productivity and corporate competitiveness. Thus the key is to increase labor productivity and improve corporate competitiveness by strengthening the third arrow of Abenomics (growth strategy) in order to raise real wages in Japan. Second, increasing wages promises to have a pump-priming effect. In particular, higher regular payments will invigorate personal consumption, centering on durable goods. Companies are encouraged to initiate wage increases on the early side if possible to avoid the “fallacy of composition”. Third, a simulation of the future direction of wages reveals that wages are likely to gradually trend upward as the economy undergoes a cyclical recovery.

Issue (2) BOJ’s price stability target: Chances that the BOJ will reach its target of a 2% rise in prices have gradually improved since new governor Kuroda took office. However, this will still depend in part on trends in exchange rates, wages, and the expected inflation rate. And while the possibilities that the BOJ will reach its target cannot be discounted, our current main scenario does not expect the rate of increase in consumer price index to reach the 2% mark. We expect additional monetary easing measures by the BOJ to carry over beyond the 2014 Jul-Sep period.

Issue (3) The current account deficit: Japan’s current account balance should be able to eventually achieve a cyclical recovery and shake off the deficits which seem to have become entrenched in recent years. According to our calculations, the balance of trade has worsened by 7 tril yen in 2013 due to the hollowing-out effect, and then another 4 tril due to the shutdown of nuclear power plants. Considering these structural changes, it is impossible to expect the current account balance to recover to the tune of 10 tril yen in the black anytime soon. However, the trade deficit is expected to shrink somewhat on a cyclical basis and finally shake off its worst phase backed by a US-led worldwide economic recovery and further progress in the weakening of the yen. The main reason Japan’s exports have been stagnant is the economic downturn overseas, and it is too soon to declare the J-curve effect a thing of the past.

Issue (4) Economic disparity: The margin of recovery has widened recently for Japan’s economy, and it appears that economic disparity should narrow a bit on a cyclical basis. The current economic recovery is being led by domestic demand such as public works spending and is a factor guarding against any further widening of disparity. The government must continue to strengthen the virtuous circle of domestic demand in order to ensure that economic disparity does not widen further.

Four risk factors facing Japan’s economy: Risks that will need to be kept in mind regarding the Japanese economy are: (1) turbulence in emerging economies, (2) China’s shadow banking problem, (3) a reigniting of the European sovereign debt crisis, and (4) a surge in crude oil prices stemming from geopolitical risk.

【Our assumptions
◆Public works spending will grow +18.1% in FY13 and fall back to –3.0% in FY14, then decline again by -10.3% in FY15. The consumption tax rate hike is scheduled for April 2014 with yet another hike in October 2015.
◆Average exchange rate of Y100.0/$ in FY13, Y100.0/$ in FY14, and Y100.0/$ in FY15.
◆US real GDP growth of +2.7% in CY14 and +3.1% in CY15.

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