Japan's Medium-term Economic Outlook - February 2015 -

Shaking off deflation and achieving financial reform – a race against time

  • Tomoya Kondo
  • Mikio Mizobata
  • Shunsuke Kobayashi
  • Miku Ishibashi


We predict that Japan’s economy will grow an annualized 1.0% in real terms over the next 10 years (2015–24), with nominal growth of 1.2%. We expect a moderate growth rate in prices, but feel that it will be difficult to achieve the BOJ’s inflation target. We expect the quantitative monetary easing policy to continue, with short-term interest placed at zero.

We anticipate that the world economy will grow an annualized 3.3% over the next 10 years. The apparent direction of the advanced nations differs from country to country, but it is possible that the change in the Fed’s monetary policy will become increasingly influential. The collapse in the price of crude oil will effect individual countries and regions differently, but we expect this to be a factor providing upward pressure for the world economy overall.

Outlook for foreign exchange rates over the next 10 years. Differences in the US and Japan monetary policies are likely to bring further downward pressure on the already weak yen. However, in around 2018 the US is expected to take a breather from its monetary tightening policy, while Japan’s own monetary easing policy will likely have reached its technical limits by around the same time. As a result, the trend toward a weak yen will likely come to an end at that time.

As an upside risk, the end to deflation may come into view through the depreciation of the yen. There is a possibility that the vicious cycle of worsening international competitiveness, lower wages, and a stronger yen will be replaced by a virtuous cycle of improving international competitiveness, higher wages, and a weaker yen. However, it will be a race against time due to the technical limits of Japan’s monetary easing policy.

The goal of reducing the primary balance deficit as a percentage of nominal GDP by half from its FY10 level by FY15 is within range, but the target of achieving a primary balance surplus by FY20 will be difficult under the current fiscal system. Public debt as a percentage of nominal GDP is foreseen to continue its steady rise.

Practicing restraint in the area of expenditures is essential to fiscal reconstruction. It is especially important to keep steadily expanding social security costs under control. Reforms leading to a fiscal system that links costs and benefits and to political institutions that can eliminate conflicts of interest between the old and the young could also work as a revitalization policy promoting regional autonomy.

Daiwa Institute of Research Ltd. reserves all copyrights of this content.
Copyright permission of Daiwa Institute of Research Ltd. is required in case of any reprint, translation, adaptation or abridgment under the copyright law. It is illegal to reprint, translate, adapt, or abridge this material without the permission of Daiwa Institute of Research Ltd., and to quote this material represents a failure to abide by this act. Legal action may be taken for any copyright infringements. The organization name and title of the author described above are as of today.