Japan’s Economy: Monthly Outlook (Mar 2018)

◆This year’s Spring Labor Offensive is attracting attention as a possible means of triggering accelerated movement toward a virtuous circle based on domestic demand. The average rate of wage increase falls well below the government’s target of 3%, and considering the fact that Japanese corporations are reporting historic highs in their earnings, there is a strong impression that this is simply not enough. As was pointed out in our January 2018 Monthly Outlook , in order to realize a truly meaningful wage hike, policy centering on labor market reform is required, including instigating means of improving productivity and breaking away from policies that promote mercantilism.

◆Of course, from the viewpoint of the short-term economic cycle the rate of increase in wages in this period’s Spring Labor Offensive represents an increase in comparison to last year. However, the negative effect on real income brought on by growth in “actual expenditure prices” far exceeds the extent of this year’s wage hikes. It is essential that the growth rate in prices regain composure in order for consumption to recover and continue expanding. Moreover, though this has not yet materialized, in the long-term there are certain risks which we must be aware of, including the flattening of the wage curve, controls on non-scheduled cash earnings (overtime hours) as a result of the new ruling which limits overtime, and further increases in insurance premium burden. These factors also require close monitoring in the future.

◆In light of the 2nd preliminary Oct-Dec 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 (+1.7% in the previous forecast), +1.2% in comparison with the previous year for FY18 (+1.3% in the previous forecast), and +0.8% in comparison with the previous year for FY19 (+0.8% 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, while 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 to slow down through FY2019.