Outlook for Japan’s Economy in 2019

◆Japan’s economy in 2018 experienced a 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.

◆The 2018 global economy, much like Japan’s economy, is experiencing a slowdown due to the falling away of “2017 bonus factors”, including an upturn in the global inventory cycle, acceleration of China’s economy in anticipation of the meeting of the National Congress of the Communist Party of China, and recovery of the European economy accompanying the shift to expansion, moving away from austerity measures. The US economy is offsetting the cyclical slowdown of the global economy somewhat through the effects of tax cuts, but at the same time, US interest rates have been on the rise due to the increase in the issuance of government bonds and the Fed’s reducing its asset holdings. This ultimately acts as a drag on the global economy.

◆Considering these factors, when we look ahead we see that there is a strong possibility that the global economy will continue to mark time. First of all, the effect of the US tax cut will eventually peter out, and global inventory adjustment will continue for some time. The increase in the cost of procuring capital in dollars may likely come to a halt for the time being, but the Eurozone may likely find itself in the same situation with the ECB ending its quantitative easing policy. On the other hand, the collapse in the price of crude oil is a positive factor for the global economy, especially the industrialized countries. It is quite possible that this could offset the large part of negative effects of the US and China raising tariffs (as long as it does not expand beyond the current scale).

◆Japan’s economic growth is expected to fall somewhat below the level of its potential growth, due to overseas demand marking time and inventory adjustment. The DIR baseline scenario for FY2018 is +0.9% in comparison with the previous year, with the FY2019 growth rate at +0.8%. The importance of domestic demand will increase relatively as overseas demand continues to do poorly, 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. At the same time, however, government expenditure exceeding the amount in consumption tax increase is planned. Japan’s economy will likely increase its dependence on domestic demand in 2019 that seen in 2018.