Japan’s Economy: Monthly Outlook (Apr 2018)

◆The Trump administration has further strengthened its hardline stance in regard to trade policy. The most constructive thing that countries holding large trade surpluses with the US can do is to make concessions either by further liberalizing their markets so as to increase imports, or by increasing import substitution production at their facilities in the US accompanying investment in the US. Measures such as these provide at least some hope that negative scenarios for the global economy associated with trade negotiations can be avoided. However, considering the fact that US political intentions may be given priority over economic rationality (for instance the importance of showing that progress has been made during the midterm elections, and the importance of preventing the rise of China as a means of maintaining US hegemony), the possibility can’t be denied that the game of chicken currently playing itself out under US leadership could continue.

◆In this report, we thoroughly examine the impact of trade policies which are currently planned on Japan’s economy and on Japanese corporate earnings. Largely speaking, the ways in which impact could be felt include (1) exports of Japanese corporations to the US (iron & steel, aluminum, etc.), (2) exports of Japanese corporations located overseas (ChinaUS and USChina), (3) side effects associated with slowdown in US and Chinese economies related to introduction of tariffs, and (4) substitution exports from Japan associated with reduction in US-China trade (i.e. Japan profiting from US-China dispute). According to the results of our calculations, impact associated with all four of the above factors on Japan’s economy and Japanese corporate performance is expected to be limited overall.

◆The impact of whatever trade policies the US and China may put into motion on the economy and on corporate earnings will be limited, whether in the case of Japan, the US, or China. Even so, the reaction on the financial markets is major. There are three factors at play here: (1) uncertainty as regards the outlook for US policy (what is the real intention of the White House?), (2) downward revision of the global economy’s growth rate due to expectations which were too high, and (3) the requirements of central banks’ exit strategies (reduction in supply of liquidity). In order for the appetite for risk to return, one of the following catalysts would be required: (1) uncertainty surrounding trade policy recedes, (2) downward revision of outlooks for the global economy becomes scarcer, and (3) fears of an interest rate hike in October 2018 or later are done away with.