Overseas Demand Worsens, but Domestic Demand Provides Support. In this report we examine the following: (1) Transferring Production due to US-China Trade Friction, (2) Personal Consumption, (3) Minimum Wage (No. 202 Update)[Summary]

◆Revised economic outlook: FY2019 +0.8%, FY2020 +0.4%:In light of the 2nd preliminary Apr-Jun 2019 GDP release we have revised our outlook for the Japanese economy. We now expect FY2019 to record growth of +0.8% in comparison with the same period of the previous year, while FY2020 is seen at +0.4%. As for the future of Japan’s economy, we see positive growth continuing through the Jul-Sep period of 2019 while there is still a possibility of last-minute demand occurring, after which it will likely slow down to a low level of growth just below the potential growth rate due to the following factors: (1) exports will be stagnant due to the slowdown in the global economy, (2) inventory adjustment is still taking place, (3) growth in capex spending is slowing down due to the decline in factory operating rates, (4) consumption will mark time in association with the slowing pace of growth in employment, and (5) the effects of the consumption tax hike.

◆(1) Transferring of Production due to US-China Trade Friction – How will it Affect Japan?: In addition to the FRB’s lowering of the interest rate as a precautionary measure, the expansionary fiscal policy, implemented ahead of the 2020 presidential election, will provide support for the US economy. This will likely encourage the US to continue its hardline policy in regard to China. With the US-China confrontation expected to continue for the long-term, a new development has been observed amongst corporations in which production facilities are transferred out of China to a third country or region. This tendency is expected to accelerate even more in the future. However, since the ratio of exports to the US from Japan’s Chinese subsidiaries is low, the transference of facilities will most likely have a limited effect. And although progress in relocating factories worldwide could stimulate Japan’s exports of capital goods, the question of stagnating investment in China could become a negative factor. Hence the benefits of transferring production cannot be expected to be especially large.

◆(2) Whither Personal Consumption? The Key to Japan’s Domestic Demand: While disposable income is achieving major growth due to the growing number of double-income households amongst worker households consisting of two or more persons, consumption appears to be restrained, centering on people in their 50s and 60s. People in their 50s and 60s tend to make do with what they have and keep their consumption expenditure down to necessities. Meanwhile they are building up their savings by reducing their selective spending. Factors leading to the strengthening of the tendency to economize include (1) Increasing educational expenses, (2) Growth in communications expenses, and (3) Accumulation of savings for the purpose of building up an inheritance for children. However, in the future, (1) Free education will be available, (2) Mobile phone communication charges will be reduced, and (3) the gift tax exemption will be expanded. In other words, all of these factors will become easier to deal with. In addition, when the consumption tax is raised, a variety of economic measures will be implemented at the same time. Hence there will be fewer factors which could hinder consumption.

◆(3) Can Raising the Minimum Wage Stimulate Japan’s Economy?: Japan’s minimum wage is said to be low compared to other countries. However, if we look at a comparison of household consumption per person, a component which is not easily influenced by differences in the economic structures, work styles or types of employment in different countries, we see that Japan is at about the same level as OECD member average, and in fact exceeds that of the US and Canada. Similarly, when a comparison is made between different regions and localities in Japan no difference is observed between regions. Working at minimum wage in one of Japan’s major urban areas does not necessarily mean that one has more money to spare than those living in Japan’s regional areas. Prior research suggests that raising the minimum wage could have a negative effect on employment. Nor can one say that labor productivity is necessarily affected in a positive way. The question of whether the minimum wage should be raised will continue to be an important one in the future from the viewpoint of expanding and strengthening social support, as well as reducing income disparity. Gradually raising wages in line with economic conditions is the more desirable route.

◆BOJ’s monetary policy: During the period covered by this outlook, the CPI is expected to hover midway between zero and 1% y/y in FY2019 and on the lower end of that same range in FY2020. Hence we expect the BOJ to maintain its current monetary easing policy for the time being. With central banks in the US and Europe strengthening their monetary easing policies, Japan too is expected to begin moving in the direction of a limited addition to its range of monetary easing.

Our assumptions
◆Public works spending is expected to grow in FY19 at +4.9%, and +1.5% in FY20.
◆Average exchange rate of Y107.7/$ in FY19, and Y107.0/$ in FY20.
◆US real GDP growth of +2.4% in CY19, and +2.0% in CY20.