Japan’s Economy: Monthly Outlook (August 2018)

◆In light of the 1st preliminary Apr-Jun 2018 GDP release we have revised our economic growth outlook. However, there is no change in our outlook after the revision. We forecast real GDP growth of +1.0% in comparison with the previous year for FY18, and +0.8% in comparison with the previous year for FY19. Our assessment of Japan’s economy remains unchanged. The economy is now in a temporary lull, with the positive factors which came together in FY17 now in the process of falling away. We expect Japan’s economy to continue slowing down for some time, and then move toward an extremely moderate growth pattern. From the midterm point of view, the capital stock cycle is maturing centering on 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. Possibilities are high that Japan’s economy peaked out in FY2017.

◆The main risk for the Japanese economy in the future is the problem of the US-China trade war. Using the DIR macro model, the estimated effects on the US and Chinese real economies due to additional US-China tariff measures is not expected to be devastating. On the other hand, neither can it be ignored. Downward pressure on GDP in the two countries is expected to be -0.25% for China, and -0.29% for the US. Meanwhile, impact on the global economy according to IMF estimates is seen at -0.10%. For Japan, the moment of truth will arrive at the trade negotiations on automobiles. If a tariff of 20% is imposed on imports of Japanese automobiles to the US, the tariff cost to Japanese motor vehicles and parts could grow to 1.7 trillion yen or more.

◆Growth in consumption is weak despite growth in wages. There are three factors behind this phenomenon: (1) It is highly possible that income has not improved as much as statistics suggest, (2) There is a bias towards one particular cluster group which has a low propensity to consume. As a result, there appears to be an overall low propensity to consume (mixed effects), and (3) Individuals faced with the flattening of the wage curve have become more practical, and are saving more. There is little chance that the environment will change dramatically in the near future. Recovery and expansion of consumption is likely to continue to be slow for some time.