Downside Risk Remains for Japanese Economy Due to Global Economic Factors In this report we examine the following: (1) stagnant consumption, (2) effects of further postponement of consumption tax increase, and (3) negative interest rates（No.189）

◆Downside risk remains for the Japanese economy due to global economic factors:In light of the 1st preliminary Jan-Mar 2016 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +0.8% in comparison with the previous year for FY16 (+0.9% in the previous forecast), and -0.1% in comparison with the previous year for FY17 (-0.1% in the previous forecast). Japan’s economy remains in a lull, but we expect it to recover gradually due to the following domestic factors: (1) growth in real wages, (2) low price of crude oil and improvement in terms of trade, and (3) the supplementary budget. However, caution is needed regarding downside risk in the global economy, especially that of China. In this outlook we have kept our previous assumption in place regarding implementation of an increase in consumption tax in April of 2017. However, we also consider the outlook for Japan’s economy assuming the consumption tax hike is delayed.

◆Challenges in jumpstarting stagnant personal consumption:It would not be an exaggeration to claim that the most important challenge currently facing Japan’s economy is to get personal consumption back on the road to recovery from its recently stagnant condition. In this report we consider possible prescriptions for the revitalization of personal consumption, looking at consumers by age group and income after first examining trends in personal consumption since the introduction of Abenomics. Quantitative results provide fundamental support for the implementation of income support policies directed toward the young and persons with low-income, who did not contribute to the upsurge in personal consumption after the introduction of Abenomics. However, in order to encourage consumer spending amongst younger people in the mid to long-term, it is essential that improvements be made in the employment and income environment through various means, including a reform of the labor market.

◆What will happen if the planned consumption tax increase is further delayed?:The sluggish world economy and the recent earthquake in Kumamoto have given rise to the possibility that the planned consumption tax increase may be further delayed. Using the DIR macro model, we performed a quantitative assessment of the short-term effects increasing the consumption tax would have on the economy and the mid to long-term effects it may have on Japan’s fiscal situation. Based on this assessment, the argument that the tax hike should be delayed as a means of promoting economic growth and carrying out fiscal reform is not very convincing. Although a certain amount of attention must be given to short-term economic trends, we believe that it would be best to go ahead with the consumption tax hike as planned, in concert with the formulation of economic measures, as a means of providing a foundation for sustainable economic growth through fiscal reform.

◆Three barriers to the effectiveness of the BOJ’s negative interest-rate policy:The BOJ made the decision to introduce a negative interest rate in January, but this has yet to produce the desired effect on Japan’s economy – that of triggering a virtuous circle scenario. The reason is that there are three barriers to the effectiveness of the BOJ’s policy. These are (1) turmoil in the global financial markets, (2) weak corporate capex, and (3) worsening of household consumer confidence. As for barrier (1), it would be difficult for the Japanese government or the BOJ to single-handedly cause global market volatility to subside. On the other hand, it can do something about (2) and (3) by responding with appropriate policies. By implementing a sound growth strategy and thereby increasing Japan’s anticipated growth rate, improvement of corporate business sentiment can be expected, along with a subsequent increase in capex spending. Meanwhile, by building a sustainable social security system, the government can remove the sense of uncertainty on the part of households regarding the future, and by doing so can also revitalize personal consumption.

◆Risk factors facing Japan’s economy:Risk factors for the Japanese economy are: (1) The downward swing of China’s economy, (2) Tumult in the economies of emerging nations in response to the US exit strategy, (3) A strong yen / weak stock market situation brought on by risk-off behavior of investors due to geopolitical risk, and (4) The threat of UK exiting the EU (Brexit), and uncertainty regarding Greece. Our outlook for China’s economy is optimistic in the short-term and pessimistic in the mid to long-term. Looking at China’s economic situation in a somewhat reductive way, the fact is that China’s government holds treasury funds totaling between 600 to 800 tril yen with which it is standing up to over 1,000 tril yen in excessive lending and over 400 tril yen in excess capital stock. China is expected to be able to avoid the bottom falling out of its economy for a little while, but in the mid to long-term, there is risk of a massive capital stock adjustment.

◆BOJ’s monetary policy:We expect additional monetary easing measures by the BOJ to be initiated in June 2016 due to fears of an economic downturn.

【Our assumptions】
◆Public works spending is expected to increase by +0.5% in FY16, and then decrease by -5.4% in FY17. An additional consumption tax hike is planned for April 2017.
◆Average exchange rate of Y109.0/$ in FY16, and Y109.0/$ in FY17.
◆US real GDP growth of +1.8% in CY16, and +2.3% in CY17.