Japan's Economic Outlook (Quarterly)
In this report we examine the direction of Japan's economy in light of Abe's postponement of the additional consumption tax hike: An assessment of Abenomics - the pros and cons(No. 183)

Japan to see real GDP growth of -0.5% in FY14 and +1.8% in FY15, with nominal GDP growth of +1.5% in FY14 and +2.5% in FY15.

December 11, 2014

  • Mitsumaru Kumagai
  • Satoshi Osanai
  • Masahiko Hashimoto
  • Shotaro Kugo
  • Hiroyuki Nagai

Main Points

PM Abe announces postponement of additional consumption tax hike: On November 18, 2014 Japan’s prime minister Shinzo Abe announced the postponement of the additional consumption tax hike, as well as plans to dissolve the lower house of the Diet and hold a general election. In light of these developments, as well as the first preliminary Jul-Sep GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of -0.5% in comparison with the previous year for FY14 (+0.7% in the previous forecast) and +1.8% in comparison with the previous year for FY15 (+1.5% in the previous forecast). The postponement of the additional consumption tax hike is expected to push the FY2015 GDP growth rate up an additional +0.53%pt. However, for the time being extreme care will have to be taken regarding risks associated with the postponement of the consumption tax hike. We call these the Triple Weaknesses – a weak bond market, weak yen, and weak stock market.

Main economic scenario for Japan: Japan’s economy is now seen as having entered a period of decline since having peaked in January 2014. However, there is a good possibility that this will have been short-term. We expect Japan’s economy to gradually recover due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) The gradual firming up of exports centering on the US.

The pros and cons of Abenomics: In this report we provide a multifaceted analysis of the pros and cons of Abenomics. There is no mistaking that Abenomics has had a positive influence on Japan’s macroeconomic situation. However, while we believe that the basic direction of Abenomics is a correct one, there are several issues which remain unresolved.

Medium-to-long-term issues: Maintaining fiscal discipline and strengthening growth strategy (The Third Arrow): The Medium-to-long-term issues facing Abenomics are (1) Maintaining fiscal discipline by making sweeping reforms to the social welfare system, and (2) Strengthening growth strategy (The Third Arrow) by easing bedrock regulations in the areas of agriculture, medical and nursing care, and labor. We believe the source of wage stagnation is in insufficient strength of the Three Arrows growth strategy, not in the income redistribution policy.

Short-term issues: Handling of benefits to lower income people and dealing with regional revitalization are key: There are pros and cons to Abenomics. Abenomics has brought great benefits to export oriented companies in the manufacturing industry, as well as to large corporations and affluent populations of major metropolitan areas. However, rewards have been few for non-manufacturing industries oriented toward domestic demand, small businesses, and the lower income populations residing in rural areas and small towns. In recognition of the current state of affairs, DIR believes the most important short-term issue is the necessity of providing more to small business and the lower income population of Japan’s small towns and rural areas in the form of increasing benefits for low income people and accelerating efforts toward regional revitalization.

BOJ’s monetary policy: Our current outlook is that the BOJ will be unable to reach its target growth rate in consumer price of 2% by the original deadline. We expect additional monetary easing measures by the BOJ to take place in the 2015 Oct-Dec period.

Five risk factors facing Japan’s economy: Risks factors for the Japanese economy are: (1) The Triple Weaknesses – a weak bond market, weak yen, and weak stock market stemming from the postponement of the additional consumption tax hike, (2) stagnant personal consumption due to the decline in real income, (3) China’s shadow banking problem, (4) tumult in the economies of emerging nations in response to the US exit strategy, and (5) a worldwide decline in stock values due to geopolitical risk.

【Our assumptions】
◆Public works spending will grow by +4.4% in FY14, then decline by -7.2% in FY15. The additional consumption tax hike originally planned for October 2015 will not take place.
◆Average exchange rate of Y109.5/$ in FY14 and Y118.0/$ in FY15.
◆US real GDP growth of +2.3% in CY14 and +2.9% in CY15.

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