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Japan's Economy: Monthly Outlook (Nov 2017)

Growth rate to peak out in FY2017 with gradual slowdown expected through FY2019

Shunsuke Kobayashi


◆In light of the 1st preliminary Jul-Sep 2017 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +1.6% in comparison with the previous year for FY17 (+1.7% in the previous forecast), +1.2% in comparison with the previous year for FY18 (+1.3% in the previous forecast), and +0.6% in comparison with the previous year for FY19. Japan’s economy has continued accelerated growth due to the following factors: (1) favorable overseas demand, (2) inventory investment, and (3) replacement demand for durables. However, the effects of these three factors will gradually fade away in the future, while in addition, the consumption tax increase planned for October 2019 is expected to have a negative impact on income. Hence we expect Japan’s economy to continue a slowdown through FY2019.

◆As in the case of the Japanese economy, the global economy has also manifested accelerated growth in 2017 due to support from positive factors as follows: (1) recovery and accumulation of inventory centering on the US, (2) fiscal expansion (slower pace of tightening) centering on the EU, and (3) acceleration of China’s economy in anticipation of the meeting of the National Congress of the Communist Party. However, possibilities are great that these factors will gradually disappear as we move into 2018. At the same time, it is also important to remember that the disappearance of these factors which have led to acceleration of growth in 2017 simply means that Japan’s economy and the global economy will gradually slow down. There is no need for excessive concern regarding this natural economic pattern.

◆With possibilities great that growth led by overseas demand may temporarily come to a halt in FY2018 and beyond, domestic demand is expected to take over the role of providing the major support for growth. The main factor behind growth in consumption in FY2017 has been the disappearance of factors which had suppressed consumption in the past. The effects of these factors are expected to disappear by FY2018, and hence we expect consumption to continue to expand in the future in tandem with the pace of improvement in employee compensation. However, while the beginnings of wage inflation can be recognized in some cases, factors acting to cancel out this effect still remain, and we expect that it will take some more time before full-fledged improvement in employee compensation begins to the extent that it would trigger a virtuous circle led by domestic demand.

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