International Policy Coordination is Key: Looking toward G7 Summit Japan（Mar 2016）

◆Downside risk grows for the Japanese economy due to external factors: In light of the 2^nd preliminary Oct-Dec 2015 GDP release (Cabinet Office) we have revised our economic growth outlook. We now forecast real GDP growth of +0.7% in comparison with the previous year for FY15 (+0.7% in the previous forecast), +0.9% 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 has remained in a lull, but we expect it to move toward a gradual recovery due to the following domestic factors: (1) Inventory adjustment is progressing, (2) The price of crude oil remains low, (3) Real wages are on the increase, and (4) The government’s supplementary budget has taken shape. However, caution is needed regarding downside risk in the overseas economy, especially that of China.

◆International policy coordination is key - looking toward G7 Summit Japan: Looking at the world economy in light of long-term cycles, it becomes clear that the current sense of stagnation in the world economy has its origin in fiscal and monetary restraint policies of the advanced nations despite the fact that at the time these policies were initiated, private sector demand was gradually recovering in those countries. The key to stopping the declines in the world economy and financial markets is international policy coordination between the advanced nations, China, and so on, which now brings the upcoming G7 summit in Japan into focus. With the economies of the emerging nations and resource-rich countries in a continuing slowdown, the world must leave behind its dependence on the emerging nations to drive economic growth, and instead, the advanced nations need to step up to the plate and take up the role of leading world economic growth. Meanwhile, though the advanced nations are left with limited room to move in the area of monetary policy, there is still some leeway for aggressive fiscal policy actions, while China should initiate practical means of avoiding further depreciation of the renminbi by adopting capital regulations.