In this report we examine four major issues facing Japan's economy after the consumption tax hike: (1) The tax hike, (2) The need to increase wages, (3) Capex, and (4) The US exit strategy(No. 181)

◆Main economic scenario for Japan: In light of the first preliminary Jan-Mar GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +1.0% in comparison with the previous year for FY14 (+1.0% in the previous forecast) and +1.5% in comparison with the previous year for FY15 (+1.5% in the previous forecast). Japan’s economy is expected to decline temporarily in the Apr-Jun 2014 period due to the effects of the increase in consumption tax, but then to get back on track and head toward recovery during the Jul-Sep period. Japan’s economy is expected to firm up in the near future due to the following positive factors: (1) The negative factors associated with the increase in consumption tax are believed to be limited, and (2) Firming up of exports due to US economic recovery.

◆Four major issues facing Japan’s economy: In this report we examine four major issues facing Japan’s economy: (1) The tax hike, (2) The need to increase wages, (3) Capex, and (4) The US exit strategy.

◆Issue (1) The tax hike: The effects of the increase in consumption tax are believed to be limited. The tax hike initially pushed the FY14 real GDP growth rate down by -0.88% pt, but then is expected to push the FY15 real GDP growth rate up by +0.26% pt.

◆Issue (2) The need to increase wages: As Japan’s economy recovers, leading to rising demand for labor in the macro-economic sense, pay-scale increases [the increasing of the base wage] are gradually becoming more widespread amongst large corporations. This tendency is mostly focused on general workers, and is expected to help push up prices. The raising of wages of part-time workers may very well follow as wages of general workers and prices increase.

◆Issue (3) Capex: Analysis of recent data suggests that capex may be hitting bottom soon. However, in order for capex to enter a truly robust growth phase, the anticipated growth rate must increase, and one of the major factors in encouraging such a development would be the success of the Third Arrow in Abe’s growth strategy.

◆Issue (4) The US exit strategy: DIR performed a quantitative simulation on the effect the US exit strategy might have on the world economy, and results show that if the Federal Reserve takes a careful approach to its exit strategy, going at an appropriate pace in relation to the recovery of the real economy, then the world economy will also get back on the road to steady recovery.

◆Challenges facing Abenomics: As we have mentioned before on a number of occasions, the biggest challenges faced by Abenomics are (1) maintaining fiscal restraint, and (2) strengthening its growth strategy. The arguments supporting this outlook focus especially on the following themes.

(1)Speed up the move from savings to investment: The effects of Abenomics are expected to lead to inflation, and the move from savings to investment must be encouraged.

(2)Halt the decline in birthrate: Halt the decline in the birthrate, which has plagued Japan for many years now, by aggressively promoting more contribution from women in the workforce.

◆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.

◆BOJ’s monetary policy: We expect additional monetary easing measures by the BOJ to carry over beyond the 2015 Jan-Mar period. While there is still a chance that the BOJ might reach its price target, our outlook as of this point in time is that the growth rate in consumer prices will not reach 2%.

【Our assumptions】
◆Public works spending will fall by –2.3% in FY14, then decline again by -10.3% in FY15. Another consumption tax hike is planned in October 2015.
◆Average exchange rate of Y100.5/$ in FY14 and Y100.0/$ in FY15.
◆US real GDP growth of +2.3% in CY14 and +3.0% in CY15.