Japan’s Economy Continues Dependence on Domestic Demand. Growth Seen falling below potential growth. In this report we examine the following: (1) How will Acceptance of Foreign Workers Influence Wages and Productivity, (2) Main Scenario for the Global Economy (3) Risk Factors for the Global Economy(No. 200 Update)[Summary]

◆Japan’s economy is expected to continue its dependence on domestic demand, while growth will likely fall below the country’s potential growth:In light of the 1st preliminary Oct-Dec 2018 GDP release we have revised our economic growth outlook. We now forecast real GDP growth of +0.6% in comparison with the previous year for FY18, and +0.7% in comparison with the previous year for FY19, and +0.6% in comparison with the previous year for FY20. 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, falling below potential growth, due to the inventory cycle and a lower contribution to the economy from overseas demand. With overseas demand no longer bringing the positive influence it once did, domestic demand will increase in importance relatively. However, domestic demand has both positive and negative factors looming up ahead. One of the positive factors is the collapse in the price of crude oil. On the other hand, there is the negative factor of the planned increase in consumption tax in October 2019. But plans are to increase government expenditures to a level exceeding that of the tax increase. Hence domestic demand will likely be able to continue steady growth throughout FY2019. Japan’s economy in 2019 will likely become even more dependent on domestic demand than it was in 2018. In this report we examine the following three issues.

◆(1) How will Acceptance of Foreign Workers Influence Wages and Productivity?: The Revised Immigration Control and Refugee Recognition Act which is to go into effect in April 2019 includes new status of residence for the purpose of employment (Specified Skills Visa No. 1 & No. 2). Over the next five years a maximum of around 350,000 workers are expected to be accepted under the new status. However, the current situation is that there is a strong tendency for foreign workers to gravitate toward urban areas and regions where manufacturing is concentrated. A quantitative analysis of the effects of bringing in foreign workers suggests that when the ratio of foreign workers grows by 1%pt, the wages of male workers increases by around 0.6%. On the other hand, no influence was seen in the case of women. Moreover, it was also found that when the number of foreign workers grows by 100,000, productivity in the manufacturing industries grows by an estimated 0.25%. In the mid to long-term, there is a good chance that bringing in foreign workers will bring about an improvement terms of employment for Japanese workers. However, Japanese workers also need further training in order to learn how to deal with a changing economy and society, while further policy measures are also needed to encourage the social integration of foreign workers.

◆(2) Main Scenario for the Global Economy: The Great Rotation began in late 2016. This is the tendency of stock prices to be high and bonds to be low, which continued until the middle of 2018. More recently the trend does not seem to have been fully manifest. The Great Rotation ends when the economy moves into a downturn and the stock market enters an adjustment phase. Hence the direction of the global economy in the near future is a major focal point. It is the top two players in the global economy who hold the key to what will happen in the future. That means the US and China. The leading economic indices for China, which leads the world in production, have recently been moving toward a comeback. Orders for Japanese machine tools from China also show signs of ending their decline. This tendency will likely gain an added push from Chinese government policy, and the central bank’s economic and monetary easing policies. Meanwhile, the ISM index, which indicates business confidence of US corporations, worsened considerably at the end of 2018. However, it improved during the following month and is still maintaining a high level. The policy decisions of President Trump are a major destabilizing factor which makes it more difficult to predict the future of both the domestic and overseas economies. Hence we recommend keeping a close watch on further developments.

◆(3) Risk Factors for the Global Economy: Interest rates were maintained at a low level for a long period of time after the global financial crisis of 2008. Low interest rates made it possible to maintain a high level of debt (high leverage). As a result, the balance of debt held by US corporations is at a proportion of GDP which is the same level it was around the time the last economic bubble burst. The danger of the situation cannot be denied – something could easily happen that could trigger a credit crunch, causing the credit cycle could experience a reversal. If any of the downside risks were to become manifest in 2019 and beyond, including (1) the Trump administration strays off course, (2) the Chinese economy worsens, (3) the European economy deteriorates, (4) Japan’s new overtime restrictions are become tighter, or (5) the deterioration of personal consumption due to the collapse of the stock market, Japan’s real GDP could decline by up to around -3.6%. Therefore great caution is required regarding downside risks affecting the global economy on into the future.

◆BOJ’s monetary policy: We expect the BOJ to maintain current monetary policy for the time being. Considering the current policy to fight deflation for the long-term, a more flexible inflation target will likely become an issue.

Our assumptions
◆Public works spending is expected to decrease in FY18 to -3.6%, then return to growth in FY19 at +3.0%, and +0.7% in FY20.
◆Average exchange rate of Y111.3/$ in FY18, and Y111.9/$ in FY19, and Y111.9/$ in CY20.
◆US real GDP growth of +2.9% in CY18, +2.6% in CY19, and +1.9% in CY20.