Japan's Economy: Monthly Outlook (Dec 2017)

◆In light of the 2nd preliminary Jul-Sep 2017 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +1.8% in comparison with the previous year for FY17 (+1.6% in the previous forecast), +1.1% in comparison with the previous year for FY18 (+1.2% in the previous forecast), and +0.6% in comparison with the previous year for FY19 (+0.6% in the previous forecast). 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, and we expect Japan’s economy to gradually slowdown throughout FY2018.

◆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 during 2018 and beyond. 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.

◆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 in FY2018 and beyond, 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.

◆As a result of economic growth experienced over the past five years, the supply-demand gap has moved into positive territory, and the number of industries now reaching their limit in terms of supply constraints is growing. In other words, it has become difficult maintaining growth dependent on sales volume alone. Instead, increasing prices has become an important tool for influencing growth potential on a nominal basis. With this as background, our economic outlook sees the slowdown in the nominal growth rate (+1.9% in FY17 to +1.5% in FY18) as fairly minor in comparison to that of the real growth rate.