Japan Country Risk Report 20 2018

Japan Country Risk Report 20 2018

Japan's ruling LDP-Komeito coalition retained its two-thirds major-ity in the lower house elections held on October 22 2017, and this outcome bodes well for policy continuity. However, the re-emergence of a land sale scandal in Japan jeopardises the chances of Prime Minister Shinzo Abe and Finance Minister Taro Aso remaining in office beyond 2018, and with them, their economic policies.

We expect Japan's economic expansion to continue over the course of 2018, as the combination of accommodative monetary and fiscal policy will likely boost investment in the near-term at a time when corporate profits are at a high. Nonetheless, the long-term growth outlook remains poor as the demographic profile worsens while the existing policy mix undermines long-term productivity gains. We therefore maintain our view for real GDP growth to average 0.4% from 2019 to 2027.

Japan's current account surplus will face downward pressure from a deterioration in the country's terms of trade, a persistent fiscal deficit, and a decline in the private sector savings rate amid an ageing population. These factors should gradually erode the current account surplus over the coming years.

BoJ Governor Haruhiko Kuroda's reappointment for a second term at the central bank will be positive for monetary policy continuity, and we expect policymakers to continue with the aggressive stance over 2018 as they seek to achieve the inflation target of 2.0%.

We expect Japan to face upside pressures on social and defence spending over the coming years amid an ageing population and rising geopolitical tensions in the region. Continued expansionary fiscal and monetary policies have the potential to undermine productive capacity and precipitate a fiscal crisis.

We are revising our 2018 average forecast for the Japanese yen to JPY105.00/USD (from JPY117.00/USD) as the ongoing positive technical trend appears to have further room to run given the unit's safe haven status due to rising global political uncertainties. Our long-term outlook is for the JPY to weaken due to poor economic growth and rising inflationary prospects over the coming years.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Positive Cyclical Growth Outlook Despite Q417 Disappointment
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
External Accounts To Weaken Slightly In 2018
Outlook On External Position
TABLE: MAIN EXPORT AND IMPORT PARTNERS
TABLE: MAIN IMPORT AND EXPORTS
TABLE: CAPITAL AND FINANCIAL ACCOUNT BALANCE
TABLE: CURRENT ACCOUNT BALANCE FORECASTS
Monetary Policy
Loose Monetary Policy To Continue Amid Kuroda's Reappointment
Monetary Policy Framework
TABLE: MONETARY POLICY FORECASTS
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
TABLE: FISCAL AND PUBLIC DEBT FORECASTS
Currency Forecast
JPY: Revising 2018 Forecast Stronger As Safe Haven Flows Return
TABLE: CURRENCY FORECAST
Chapter 2: 10-Year Forecast
The Japanese Economy To 2027
Abenomics Hangover Only Just Beginning
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Scandal Jeopardises Policy Continuity Beyond 2018
TABLE: POLITICAL OVERVIEW
TABLE: JAPANESE PRIME MINISTERS SINCE 1990
Long-Term Political Outlook
Abe And LDP Face Colossal Long-Term Challenges
Chapter 4: Operational Risk
Developed States
TABLE: LABOUR MARKET RISK INDEX
TABLE: LOGISTICS RISK INDEX
TABLE: CRIME AND SECURITY RISK INDEX
TABLE: TRADE AND INVESTMENT RISK INDEX
Chapter 5: BMI Global Macro Outlook
Trade Tensions Take Centre Stage
TABLE: GLOBAL MACROECONOMIC FORECASTS
TABLE: DEVELOPED STATES – REAL GDP GROWTH, % y-o-y
TABLE: EMERGING MARKETS – REAL GDP GROWTH, % y-o-y
TABLE: JAPAN – MACROECONOMIC DATA & FORECASTS

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