Economy cruising at low altitude, but avoiding bottom falling out. In this report we examine the following: (1) Future of decoupling of domestic and overseas demand, (2) Advanced nations retain fiscal strength(No.203)[Summary]

Japan to see real GDP growth of +0.8% in FY19 and +0.4% in FY20, with nominal GDP growth of +1.4% in FY19 and +1.0% in FY20.

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  • Japan's Economic Outlook (Quarterly)
  • Mitsumaru Kumagai
  • Keiji Kanda
  • Hikaru Sato
  • Mikio Mizobata
  • Masahiko Hashimoto
  • Shunsuke Kobayashi
  • Akane Yamaguchi
  • Yutaro Suzuki
  • Wakaba Kobayashi
  • Munehisa Tamura
  • Megumi Wada
  • Kazuma Kishikawa


Revised economic outlook: FY2019 +0.8%, FY2020 +0.4%: In light of the 1st preliminary Jul-Sep 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%. There are no major changes in comparison to the last period. As for the future of Japan’s economy, it will likely continue at a low level of growth just below the potential growth rate. The major concern regarding recent developments in Japan’s economy is stagnant exports. Until now it was assumed that favorable results for domestic demand would offset stagnant overseas demand. However, considering the reaction to last minute demand and the negative income effect which accompanies the increase in consumption tax, it would be difficult to predict strong growth in domestic demand in the future. On the other hand, exports to some destinations and exports in some industries show signs of an end coming to declines, and the growth rate has been able to avoid the bottom falling out.

(1)Will decoupling of domestic and overseas demand continue?: Domestic demand has remained favorable despite the slowdown in exports because exports of certain items manage to maintain underlying strength while overall exports experience a moderate decline. In addition, the ripple effect of declining exports has spread through mainly smaller industries as of this point. But the possibilities are growing that some larger industries such as transport equipment, which has managed to maintain favorable performance until now, may begin experience a slowdown in exports in the future, and this type of industry can create a larger ripple effect. As for domestic demand, which has maintained favorability up to this point, danger of a slowdown is expected to occur in the future. On the other hand, exports of high tech related products, which had been soft now, are showing signs of bottoming out. There is not much of a chance that the bottom will fall out of exports overall, and as domestic demand slows down, the divergence between domestic and overseas demand will grow smaller, and they will move closer to convergence.

(2)International comparison of fiscal strength, and the direction of Japan’s fiscal policy: In a comparison of 32 advanced nations looking at fiscal strength and GDP gap, Germany and the UK show great fiscal strength, while at the same time exhibiting a major need for economic stimulus. Conversely, Japan and the US have less fiscal strength, but nor do they show much need for economic stimulus. Expansion of fiscal expenditure should be carried out with an eye to wise spending, while fiscal strength should be increased when economic conditions are good. It is important to focus government spending on projects that contribute to strengthening the private sector's growth potential, as well as measures oriented toward increase in medium to long-term expenditure. Japan’s social capital stock is fairly high from an international perspective, but social capital, such as that going into disaster prevention and reduction, shows room for improvement in preparedness and infrastructure.

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 +5.3%, and +2.4% in FY20.
◆Average exchange rate of Y108.5/$ in FY19, and Y108.5/$ in FY20.
◆US real GDP growth of +2.3% in CY19, and +2.0% in CY20.

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