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What Will Happen if China's Economic Bubble Bursts? Japan's economy has entered a temporary lull, but according to our outlook, will avoid recession.(No.186)

Japan to see real GDP growth of +1.1% in FY15 and +1.9% in FY16, with nominal GDP growth of +2.6% in FY15 and +2.5% in FY16.

Mitsumaru Kumagai

Satoshi Osanai

Keisuke Okamoto

Shunsuke Kobayashi

Shotaro Kugo

Hiroyuki Nagai

Akira Yamaguchi


Japan’s economy enters a temporary lull: In light of the 1st preliminary Apr-Jun 2015 GDP release (Cabinet Office), we have revised our economic growth outlook. We now forecast real GDP growth of +1.1% in comparison with the previous year for FY15 (+2.0% in the previous forecast) and +1.9% in comparison with the previous year for FY16 (+1.9% in the previous forecast). Japan’s economy has entered a temporary lull, but we expect it to avoid falling into recession due to the following factors: (1) Continuation of the virtuous circle brought on by Abenomics, and (2) A gradual comeback in exports centering on the US.

What will happen if China’s economic bubble bursts?: In this report we examine the multiple dimensions of the consequences, as well as their magnitude, if China’s economic bubble bursts. This is the key element of our report. According to our main economic scenario, the chances that China’s economy could become mired in crisis are limited. Even if the amount of uncollectible loans held by China’s banks were to suddenly surge in the future, it would be a bit hasty to assume that there would necessarily be an immediate fiscal crisis, though it cannot be denied that there is always the possibility that both China’s economy and the global financial markets could be thrown into turmoil. What is more frightening is the risk of a major capital stock adjustment. According to a DIR simulation, if a capital stock adjustment were to occur, China’s potential growth rate would at best fall to around 4%, while real economic growth would hover at around zero. A more serious meltdown would see China’s potential growth rate falling to as little as 1.6%, with real economic growth bringing in significantly negative numbers. Furthermore, we are of the opinion that China’s devaluation of the renminbi will have little effect, as it is merely a drop in the bucket.

Japan’s main economic scenario – the economy will shake off the temporary lull and enter a moderate economic growth phase: The major focal point for Japan’s economy in the near future is the question of whether the current situation is merely a temporary lull, or whether Japan will become mired in a recession. Judging from the performance of major demand components according to GDP statistics, there is some risk of the economy falling into recession. However, examination of three major judgment criteria (“merkmal”) suggests that Japan’s economy will be able to avoid a recession and head toward a moderate economic growth phase.

Is the US economy going to be okay?: We expect the weakness in the corporate sector of US economy to be set off by the household sector and that the US economy will be able to avoid falling into a lull, instead moving toward a substantial recovery. Considering the maturation of the economy, we expect the US to experience a sustained economic expansion.

Risk factors facing Japan’s economy: Risk factors for the Japanese economy are: (1) The downward swing of China’s economy, (2) Tumult in the economies of emerging nations in response to the US exit strategy, (3) A worldwide decline in stock values due to geopolitical risk, (4) The worsening of the Eurozone economy, and (5) The Triple Weaknesses – a weak bond market, weak yen, and weak stock market due to loss of fiscal discipline. Our outlook places emphasis on China’s business cycle, a question of the greatest concern at this time for those involved in the financial markets, and we provide an in-depth analysis of the situation. We believe that the bottom falling out of China’s economy can be avoided for some time. China does not have a truly Capitalist system. Hence the problem can probably be delayed for the next year or two. Moreover, personal consumption in China is determined by real estate prices rather than stock prices, and real estate prices have recently begun to show signs of bottoming out. The other factor here is that the main driver of the world’s economy remains the US, so even if China’s economy slows down a bit, the negative influence on Japan’s economy is fairly limited.

BOJ’s monetary policy: We expect additional monetary easing measures by the BOJ to be shelved until spring 2016 or later. It should be noted that the financial markets are now leaning more strongly toward the opinion that the BOJ will not carry out additional monetary easing measures.

【Our assumptions】
◆Public works spending is expected to decline by -2.8% in FY15, and -4.2% in FY16. An additional consumption tax hike is planned for April 2017.
◆Average exchange rate of Y123.7/$ in FY15 and Y125.0/$ in FY16.
◆US real GDP growth of +2.3% in CY15 and +2.8% in CY16.

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