Japan’s Economy: Monthly Outlook (May 2018)

◆In light of the 1st preliminary Jan-Mar 2018 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +1.0% in comparison with the previous year for FY18 (+1.2% in the previous forecast), and +0.8% in comparison with the previous year for FY19 (+0.8% in the previous forecast). Japan’s economy is expected to enter a temporary lull, with the positive factors which came together in FY17 now appearing to be in the process of falling away. Until now exports had been accelerating due to the following overseas demand factors: (1) the inventory cycle moving into the recovery phase in the US, (2) China’s economy speeding up in anticipation of the meeting of the National Congress of the Communist Party in October last year, and (3) the recovery in Europe’s economy associated with the shift from austerity to an expansionary fiscal policy.

◆Domestic demand may very possibly continue to mark time with positive factors providing support in the past having run their course. These include (1) the inventory cycle is nearing the end of the accumulation phase, (2) the replacement cycle for durables will very likely peak out soon, and (3) the trend of shifting employees from non-regular employee status to regular employee status, most likely a means of dealing with The Revised Labor Contracts Act, has run its course. However, assuming that negative growth will continue is an overly pessimistic view. For one thing, the effect of growth in the price of fresh foods on consumption restraint has completed its cycle. Meanwhile, the effects of bad weather in major destinations for Japanese exports have also dissipated, and effects of the tax cut in the US are expected to appear in the future.

◆From the midterm point of view, the capital stock cycle is maturing in the US, Japan, and China, while in addition, a negative income effect is expected when the planned increase in the consumption tax comes along in October 2019. The outlook for Japan’s economy in FY19 is hence a continued slowdown throughout the year. It is quite possible that Japan’s economic growth rate peaked out in FY17.

◆One of the risk factors in the future is the rising price of crude oil. If the average price of crude oil in 2018 continues along the lines of the recent prevailing price (market price) of around 70USD/bbl., the following effects on Japan’s economy are expected in comparison with 2017 performance when the price of crude oil averaged around 50USD/bbl.: (1) Nominal import growth in simple terms is expected to be 2.9 tril yen (0.52% decline in nominal GDP), (2) Analysis of corporate earnings using industrial input-output table sees a decline of 1.6 tril yen, and (3) Estimate according to macro-economic model sees real GDP declining 0.22% and nominal GDP declining by 0.97%.