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Japan’s Economy: Monthly Outlook (May 2019)

Resumption of US-China “cold war” could cause Japanese exports to suffer a maximum decline of around 1.3 tril yen

Shunsuke Kobayashi

Yota Hirono


◆In light of the 1st preliminary Jan-Mar 2019 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +0.5% in comparison with the previous year for FY19, and +0.5% in comparison with the previous year for FY20. Japan’s economy will most likely continue cruising at low altitude in the future, with a growth rate below that of the potential growth rate.

◆Japan’s economy has continued to mark time at zero growth since the end of 2017. This has been due to stagnant exports and subsequent inventory adjustment. With overseas demand lacking much movement, domestic demand has increased in importance, but this area has also been in the doldrums of late. The collapse of the price of crude oil since the autumn of 2018 brought some temporary leverage to household real income, but now that crude oil is on the way up again, that positive factor will fall by the wayside in the future. In addition, plans are to increase the consumption tax in October 2019, and this means it will be difficult to expect a full-fledged recovery for some time.

◆With no hope for a recovery scenario for domestic demand, overseas demand will have to bottom out and make a comeback in order for the Japanese economy to manage a full-fledged return to a growth trend where the growth rate will exceed potential growth. Both positive and negative factors have recently appeared for exports to China, which have continued to play the role of stimulating overseas demand (exports). On the positive side, the Chinese economy can be expected to bottom out soon due to economic measures implemented by the government. Growth in financing and infrastructure investment are especially promising at this time.

◆But now this positive factor has been ruined by the resumption of the US-China “cold war”. According to an estimate which includes the concept of value-added exports in its calculation model, Japan’s export value can be expected to decline by approximately 0.7 tril yen due to additional US and China tariffs which have already been decided on. Meanwhile, if the US imposes additional tariffs of 25% on almost all Chinese products, Japanese exports could be forced downwards by approximately 1.3 tril yen.

◆At the same time, the effects of US-China trade friction on the Japanese economy are not all bad. First of all, the imposition of tariffs increases revenue. If the US and China make use of the fiscal income which is generated to increase government expenditure, the economic shock of the tariffs may be offset somewhat. Meanwhile, if the tariffs which the US and China have imposed on each other lead to growth in substitute production in the emerging nations, including Southeast Asia, this would likely generate opportunities for Japanese corporations to expand their sales networks in these countries. This factor would be an important path to improving Japan’s exports and putting Japan’s economy back onto the road to full-fledged recovery.

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