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Japan’s Economy: Monthly Outlook (November 2019)

Main cause of slowdown switches from overseas demand to domestic demand

Shunsuke Kobayashi

Yutaro Suzuki


◆In light of the 1st preliminary Jul-Sep 2019 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +0.8% in comparison with the previous year for FY19, and +0.4% 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 just below that of the potential growth rate. However, the main cause of the slowdown is expected to switch from overseas demand to domestic demand. Looking back at around a year ago, it was mainly domestic demand providing support for the Japanese economy, while overseas demand continued to stagnate. However, we may be approaching the turning point where the scenario changes from the previous one in which it was assumed that favorable results for domestic demand would offset stagnant overseas demand.

◆Early in 2018 exports to Asia and exports of electrical equipment (to all destinations), which had been in a declining phase for nearly two years, saw an end to the slowdown, and experienced a turnaround to moderate growth. Of course, it would be difficult to expect a full-fledged recovery in overall exports from this fact alone. First of all, in order for exports to Asia and exports of electrical equipment to continue recovering, we would have to assume no rekindling of the US-China tariff-raising competition. Secondly, lagging behind exports to Asia and exports of electrical equipment, exports of general machinery and transport equipment to the advanced nations are showing an increasing tendency toward adjustment. Therefore, rather than exports overall clearly moving toward recovery, we believe that the more appropriate outlook would be that overall exports should be able to avoid the bottom falling out, with performance by destination and industry moving back and forth between favorable and unfavorable conditions.

◆As for the future of Japan’s economy, the main concern is the possibility that domestic demand may weaken in its effect of bolstering the economy. First of all, in the short-term, we will see a reaction to last minute demand which appeared just prior to the consumption tax hike. Secondly, the negative income effect associated with the tax hike is expected to become manifest in the midterm. Meanwhile, as was learned the last time the consumption tax was increased, we cannot ignore the possibility that the tendency to become more budget-minded may increase after the tax hike. Finally, we must take heed of the fact that sluggish growth in corporate earnings centering on manufacturing will have a delayed effect on the pace of improvement in employment and income, eventually causing these areas to stagnate as well. In addition, efforts of corporations to come to terms with the adoption of the new overtime regulations with penalty in FY2019 will continue to be a factor inhibiting labor inputs throughout FY2020.

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