Japan’s Economy: Monthly Outlook (Nov. 2018)

◆The 2018 slowdown in the global economy is due to the falling away of “2017 bonus factors”, including (1) an upturn in the inventory cycle centering on the US, (2) acceleration of China’s economy in anticipation of the meeting of the National Congress of the Communist Party of China, and (3) recovery of the European economy accompanying the shift to expansion, moving away from austerity measures. We indicated as much in our past reports. Now the 2018 global economy has an additional feature – the US standing out as the one remaining economy showing strength. There are three factors behind this situation: (1) the effects of US tax cuts, (2) global increase in finance costs as a result of US fiscal and monetary policies, and (3) the US getting an enhanced take in comparison with its allies in the zero-sum game of a US-China cold war.

◆Considering these factors, when we look ahead we see that there is a strong possibility that the global economy will continue to slow down. First of all, in cyclical terms, the global economy is moving into the inventory adjustment phase. Meanwhile, it is likely that interest on US Treasuries will remain high due to the deteriorating supply and demand situation. Europe may likely find itself in the same situation after 2019. At the same time there is a good chance that the negative effects of the US and China raising tariffs may be largely offset if the price of crude oil continues to drop as it recently began to (this of course depends on the scale of the tariff hikes becoming no greater than has currently been made public). However, the global economy will most likely to continue a moderate slowdown as inventory adjustments continue, and finance costs continue to rise centering on the US and Europe.

◆As in the case of the global economy, Japan’s economy has also experienced the falling away of “2017 bonus factors”, and currently remains in a lull. First of all, the inventory cycle is moving away from the accumulation phase and into a stock pile-up phase. In either case, there is a strong possibility that an inventory adjustment phase will ensue. Meanwhile, exports are showing strong signs of peaking out in a reflection of the global economic slowdown. Therefore, there is a strong possibility that Japan’s economy will continue to perform a bit below its potential growth rate.

◆The importance of domestic demand will increase relatively as the contribution of overseas demand to Japan’s economic growth declines, but there are both positive and negative factors in store for domestic demand in the future. One of the positive factors is the fall in the price of crude oil. On the other hand, the consumption tax hike planned for October 2019 will act as a negative factor on the growth rate. These effects will change depending on the future price of crude oil and the government’s fiscal policy response. However, not much change is seen from the above mentioned “low-flying plane” scenario. Our baseline scenario for Japan’s economy is a growth rate of +1.0% for FY2018, and +0.8% in FY2019.