Japan’s Economy Headed toward Slowdown: Problem points expected in 2019. In this report we examine the following: (1) The Labor Shortage and Acceptance of Foreign Workers, (2) Labor Productivity of Small & Medium-Sized Corporations, and (3) Global Money Flow(No. 199)[Summary]

Japan to see real GDP growth of +1.0% in FY18, and +0.8% in FY19, with nominal GDP growth of +1.0% in FY18, and +1.9% in FY19.

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  • Japan's Economic Outlook (Quarterly)
  • Mitsumaru Kumagai
  • Tomoya Kondo
  • Mikio Mizobata
  • Keiji Kanda
  • Shunsuke Kobayashi
  • Akane Yamaguchi
  • Ayuko Watanabe
  • Yota Hirono
  • Yutaro Suzuki
  • Eriko Kakinuma
  • Munehisa Tamura


Japan’s economy is in a temporary lull, with a gradual slowdown seen throughout FY2019: In light of the 1st preliminary Jul-Sep 2018 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +1.0% in comparison with the previous year for FY18, and +0.8% in comparison with the previous year for FY19. Our assessment of Japan’s economy remains unchanged. The economy is now in a temporary lull, and most likely will continue cruising at low altitude in the future due to the inventory cycle and a lower contribution to the economy from overseas demand. The inventory cycle is moving away from the accumulation phase and into a stock pile-up phase. In either case, there is a strong possibility that an inventory adjustment phase will ensue. Exports had been a positive factor up through the previous fiscal year, but this factor has now disappeared. Meanwhile, looking at the domestic economy, the planned increase in consumption tax in October 2019 will cause further decline. Hence Japan’s economy will most likely continue to perform a bit below its potential growth rate for the time being.

The Labor Shortage and Acceptance of Foreign Workers: With no change in the current employment structure, the number of employed persons in Japan is expected to decrease by approximately six million in 2030, and around 23 million by 2060. Preparing the environment to allow for more labor participation is urgent, but looking forward to the year 2060, even if we assume a certain amount of improvement in productivity and a major increase in the employment of the elderly, it would still be difficult if not impossible to maintain the scale of Japan’s economy. In order to maintain the scale of Japan’s economy in the year 2060, there would have to be net inflow of foreign workers totaling between 70,000 and 310,000 per year. This means raising the percentage of foreign workers from the current 2% to somewhere between 7% and 25% in 2060. Building a policy framework for the acceptance of foreign workers and becoming more proactive in attracting them is another problem. Looking ahead to the future of Japan’s labor market, it is extremely important to prepare the environment for the acceptance of foreign workers.

Much Room for Improvement in Labor Productivity at Small & Medium-Sized Corporations: There is much room for improvement in labor productivity amongst Japan’s small & medium-sized corporations both from the viewpoint of business expansion and urban concentration. If the scale of Japan’s smaller corporations were to reach that of the US, labor productivity would grow by 6.8%, and more urban concentration would bring growth of 20.7% in labor productivity. The benefits of expanding the scale of corporations is especially pronounced for manufacturers (food & beverages, textiles, and fabricated metals), and retail. In order to take advantage of the potential of small and medium-sized corporations which has been cultivated up to this point, it is first necessary to improve Japan’s labor productivity through M&A, and strengthening of partnerships through ecosystem development, while promoting smooth business succession. Furthermore, in Japan’s ultra-aging society, improving labor productivity through the promotion of urban concentration is a long-term issue, especially for the service industries.

Risk in Global Money Flows: When we examine trends in global money flow, we can see how the US takes in large amounts of government bond investments from other countries while disposing of large volumes of risk assets. It becomes apparent that global money flow performs a pivotal role in this process. Since the beginning of 2018, however, this framework has begun to change. The main factor causing this change is growth in the US long-term interest rate (interest on the US 10-year Treasury). We have performed an estimate of how much growth to expect in the US long-term interest rate in the future based on outlooks from the Fed and the CBO. In addition, we also took into consideration growth in the EU’s long-term interest rate as a result of the ECB’s exit strategy, and used this as a risk factor in 2019. If US and European long-term interest rates grow higher than expected, this will be a negative factor affecting the real economies of advanced nations, as this also causes the cost of raising capital to increase.

Problem Points in 2019: Concerns that Japan’s Economy may be Facing Tail Risk: There is concern that beginning in 2019 and beyond, there will be a variety of downside risks for Japan. Potential risks include the following: (1) the Trump administration loses direction, (2) deterioration of China’s economy, (3) the deterioration of Europe’s economy, (4) the rising price of crude oil, (5) the strengthening of overtime regulations, and (6) the effects of an increase in consumption tax. If these risks become a reality, Japan’s real GDP would likely be pushed down by around -4%. This could have negative effects along the same lines as the 2008 global financial crisis.

BOJ’s monetary policy: We expect the BOJ to maintain current monetary policy for the time being. Considering the policy introduced in September 2016 to permanently battle deflation, the issue is expected to be creating a more flexible inflation target.

Our assumptions
◆Public works spending is expected to decrease in FY18 to -0.7%, then return to growth in FY19 at +2.9%.
◆Average exchange rate of Y111.8/$ in FY18, and Y113.5/$ in FY19.
◆US real GDP growth of +2.9% in CY18, and +2.5% in CY19.

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