How will Japan's economy respond to Trump Shock? In this report we examine the following: (1) Overseas Investment Behavior, (2) Personal Consumption, and (3) How to Improve Economic Statistics(No. 191)<Revised>

Japan to see real GDP growth of +1.1% in FY16 and +0.9% in FY17, with nominal GDP growth of +1.4% in FY16 and +1.3% in FY17.

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  • Mitsumaru Kumagai
  • Satoshi Osanai
  • Keisuke Okamoto
  • Shunsuke Kobayashi
  • Tsutomu Saito
  • Kazuma Maeda
  • Makoto Tanaka

Summary

How will Japan’s economy respond to Trump Shock?: In light of the 1st preliminary Jul-Sep 2016 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +1.1% in comparison with the previous year for FY16 (+0.9% in the previous forecast), and +0.9% in comparison with the previous year for FY17 (+0.9% in the previous forecast). Japan’s economy is expected 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) implementation of an economic stimulus package. However, there is downside risk for Japan’s economy, which could arise from the ripple effects of Donald Trump’s winning of the recent US presidential election. These are mainly (1) yen appreciation, (2) stock price lows, and (3) world economic slowdown. If nothing else, there is expected to be increasing uncertainty in the world economy in the mid to long-term, coupled with risk-off behavior in the global financial markets, which could cause worldwide stock price lows and a rapid depreciation of the dollar.


Overseas investment behaviors of Japanese corporations, and domestic ripple effect: With both Japan’s potential growth rate and expected growth rate at a low level, corporations are beginning to look for growth opportunities in overseas markets. An analysis of the investment behaviors of domestic corporations and their overseas subsidiaries reveals the tendency to take the practical approach and decrease the amount of domestic capex while rerouting resources to Asia and North America. Meanwhile, the divergence between real GDP and real GNI has been widening of late. In addition to improving terms of trade, this is due to backflow of earnings from overseas subsidiaries to domestic parent companies accompanying increased overseas investments. Based on actual value in FY2015, the positive effect of backflow of overseas profits is estimated to have brought a 3.2 trillion yen improvement in employee compensation and an approximately 2.4 trillion yen increase in nominal personal consumption.


Why Does Personal Consumption Remain Stagnant?: Personal income continues to decline despite the two-and-a-half years which have passed since the 2014 increase in consumption tax. Looking at the short-term factors behind this phenomenon, it is believed that personal consumption has been weighed down by the elimination of the special payment system for the national pension, stagnant growth in disposable income, and a reactionary decline following past economic stimulus measures. Between FY2012 and FY2014, these factors have brought downward pressure on personal consumption totaling 1.3%pt. On the other hand, structural problems may also become a drag on personal consumption in the midterm, including consumers becoming increasingly budget-minded, increasing uncertainty regarding the future, and issues surrounding employment for the younger generation. Hopes are that the government will build a sustainable social security system and speed up efforts to introduce the principle of equal pay for equal work.


What is needed to improve Japan’s economic statistics?: Japan’s economic statistics compare poorly with those of other countries both in the area of accuracy and prompt reporting. With Japan’s potential growth rate on the decline, we believe that it is important to first aim for more accuracy in economic statistics. In considering concrete methods of improving statistics, we performed an analysis using a survey of households. By replacing items within the category of goods which tend to fluctuate widely, we were able to solve the problem of underestimating. On the other hand, no improvement was gained in the category of services even when using figures which complemented the Household Survey. Figures remained weaker than those on the supply-side. Since this may have some effect on underestimating GDP, we believe that related statistics should also be studied closely. Further detailed analyses should be performed in the future in order to uncover problem points and consider means of handling potential problems in a manner appropriate for each statistic.


Risk factors facing Japan’s economy: Risk factors for the Japanese economy are: (1) The policies of President Elect Donald Trump, (2) The downward swing of China’s economy, (3) Tumult in the economies of emerging nations in response to the US exit strategy, (4) A strong yen / weak stock market situation brought on by risk-off behavior of investors due to geopolitical risk, and (5) Negotiations regarding the UK’s withdrawal from the EU (Brexit), and deleveraging at EU financial institutions.


BOJ’s monetary policy: We expect the BOJ to maintain current monetary policy for the time being. Considering the policy introduced in September to permanently battle deflation, the issue is expected to be creating a more flexible inflation target.


Our assumptions
◆Public works spending is expected to increase by +6.8% in FY16, and then decrease by -2.4% in FY17.
◆Average exchange rate of Y106.8/$ in FY16, and Y108.3/$ in FY17.
◆US real GDP growth of +1.5% in CY16, and +2.1% in CY17.

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