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Japan’s Economy: Monthly Outlook (March 2019)

Doubts regarding five prevailing views on Japan’s economy

Shunsuke Kobayashi

Yota Hirono

Summary

◆There are a variety of prevailing views on the Japanese economy. In this report, we examine these common views to confirm whether or not they are indeed appropriate, and attempt to come to an assessment of Japan’s economy that has been heretofore missed by the consensus.

◆Assumption: Consumption is being held down by uncertainty regarding the future. There is actually little to backup this statement. Trends in the propensity to consume can largely be explained by demographics. The propensity to consume has increased temporarily in the past around the time of an increase in consumption tax due to the ratchet effect. But it soon returned to pre-tax hike levels. This brings into question the assumption that the propensity to consume improves when advances are made in fiscal reconstruction.

◆Assumption: The negative effects of increasing consumption tax will be offset by fiscal stimulus. This is an appropriate assumption only if we’re talking about FY2019. Fiscal stimulus planned in FY2019 is huge, and exceeds the tax increase effect. However, stimulus focuses mainly on public investment. Construction and related industries are therefore expected to benefit more than households. The remaining 800 billion yen in stimulus measures will not be spent all at once, immediately after the tax hike, nor will the stimulus last forever. The effects of the increase in consumption tax are expected to appear gradually between the second half of FY2019 into FY2020.

◆Assumption: Investment in labor-saving devices will facilitate growth. This is a grand illusion. Marginal productivity in a cost comparison demonstrates that the cost of labor is higher than the cost of capital in all industries. In the past, the most practical decision for corporations was to increase labor input, but due to the limitations of the labor shortage, the reality is that corporations are forced to engage in inefficient capital expenditure. Meanwhile, the domestic supply of capital goods is unable to keep up with demand due to the shortage of labor, and hence must be substituted with imports.

◆Assumption: The adjustment phase of the inventory cycle is nearing its end. There may be no real debate here. Looking at the current level (not necessarily in y/y terms), the inventory adjustment phase which began at the beginning of 2018 is about halfway through its course. Hence, in the future, production activities will be influenced mostly by shipments (demand). For Japan, this means that overseas demand (exports) holds the key. At this time exports to China are especially important.

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