Four possible risks facing Japan's economy(Oct 2013)

◆Main scenario—Japanese economy to continue steadily growing: After hitting a trough in November 2012, Japan’s economy entered a recovery phase and we believe it will continue to expand steadily. The economic policies of the Abe administration (“Abenomics”) represent an appropriate set of policies with the potential of jump-starting the revival of the Japanese economy, and monetary policy measures in particular are yielding marked results. We believe that there is little basis to the two criticisms leveled against Abenomics, namely (1) it will have an adverse impact on the economy overall if long-term interest rates rise and (2) employee income will fail to increase amid rising inflation, and living standards will fall. Going forward, we believe that the Abe administration will need to actively engage in measures such as (1) maintaining fiscal discipline by making fundamental reforms to the social security system and (2) enhancing comprehensive growth strategies through deregulation and reducing the effective corporate tax rate.

◆Four possible risks 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 reignition of the European sovereign debt crisis, and (4) a surge in crude oil prices stemming from geopolitical risk. Of these four risks, it is worth noting that the first is closely related to the second and third. In this report, we examine the world economic cycle. In the past, advanced economies led by the US drove emerging economies. However, a decoupling is currently occurring—advanced economies are performing well but emerging economies are stagnating. We believe that this decoupling is occurring for three reasons: (1) the dwindling amount of loans from European financial institutions to emerging economies in light of the European debt crisis, (2) the sluggishness of the Chinese economy, and (3) concerns that money will be taken out of emerging economies based on worries that the Fed will adopt a hasty exit from quantitative easing. We anticipate that a further deterioration of emerging economies will be avoided as the US economy continues to expand. Nevertheless, we think the state and the future direction of the Chinese economy will continue to require close monitoring.