Japan’s Economy: Monthly Outlook (June 2018)

◆The US-China tariff battle has moved into extra innings. Especially notable is the fact that US President Trump has announced plans to put additional tariffs in place, and uncertainty remains regarding what may take place in the future. However, as of this point, the only policy measures which have actually been decided upon are as follows: (1) US tariff hike on iron & steel and aluminum, (2) US tariff hike on 50 billion dollars’ worth of products imported from China, (3) China to place retaliatory tariffs equivalent to the above amount, and (4) China to cut tariffs on some items including automobiles, etc.

◆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, we expect negative impacts from (1), (2), and (3) above, but a positive result from number (4), which should generally offset the negative effects. Rather than the US-China situation, the moment of truth for Japanese corporations will be the upcoming trade negotiations on automobiles. If tariffs are raised on automobiles as President Trump has stated, the cost of tariffs are expected to literally rise an order of magnitude above two trillion yen.

◆Also in this report, we summarize arguments regarding the effects of the planned consumption tax hike in October 2019, along with an estimate of those effects. The consumption tax hike will effect consumption and the real economy through the substitution effect and the income effect. Arguments regarding the income effect turned out to be insufficient after the last consumption tax hike. Meanwhile, in estimating the income effect, we have found it most appropriate to make use of the average propensity to consume, rather than the marginal propensity to consume. We estimate that in association with the next consumption tax hike, the degree of 3.2 trillion yen in a permanent consumption reduction effect will be brought on. We have found that many estimates one sees floating around mistakenly use the concept of marginal propensity to consume, which can lead to the underestimating of the effects of the consumption tax hike.

◆In light of the 2nd 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 (+1.0% 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 falling away. 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.