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Japan Country Risk Reports Q2 2015

Japan Country Risk Reports Q2 2015

Core Views

We continue to see real GDP growth coming in at 0.8% in 2015, marking an uptick from an estimated 0.3% in 2014, but disappointing consensus expectations of 1.0%. While the collapse in oil prices will provide support to the economy through a greatly improved terms of trade picture, structural factors will continue to undermine growth.

As we previously anticipated, Japanese policymakers are seeking once again to create inflation as a means of boosting economic growth. While the collapse in oil prices will cause inflation to fall in 2015, greater monetary easing increases the likelihood of high inflation over the coming years.

Japan's fiscal and monetary policy has become increasingly indistinguishable in recent years, with the Bank of Japan (BoJ) acting aggressively in the government bond market to lower bond yields and spur bank lending. This has resulted in a reduction of traditional risks facing banks, in the form of exposure to rising bond yields, but also the introduction of new risks from a further deterioration in the domestic economy.

With the yen down 37% over the past three years against the US dollar despite there having been effectively no difference in domestic price growth between Japan and the US, a bullish medium-term case could be made. However, despite the sell-off, the yen is by no means extremely cheap and the current policy direction will make it difficult for the yen to experience any meaningful appreciation. As such, we hold a neutral view on the currency.

Japanese Prime Minister Shinzo Abe's landslide election victory leaves him well positioned to remain in office for several more years and enact major reforms. Abe will need to act quickly to convince investors of his sincerity for economic restructuring, for a failure to do so would raise question marks about whether Japan can reform at all or is doomed to stagnate indefinitely.

Major Forecast Changes

We have revised down our forecast for the yen owing to recent weakness, and now expect the currency to remain at around JPY120.00/ USD over the course of 2015. We believe that risks are evenly weighted to the upside and downside.

We maintain that Japan has made a fundamental transition away from deflation to inflation and that price pressure will grow over the coming years. However, the collapse in global oil prices is likely to delay high levels of inflation for some time to come. We are forecasting consumer price inflation to average 1.8% in 2015, (revised from 2.7% previously), down from an estimated 2.8% in 2014 (revised from 2.4% previously).


Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Long-Term Implications Of Abe's Election Victory
Japanese Prime Minister Shinzo Abe's landslide election victory leaves him well positioned to remain in office for several more years
and enact major reforms. Abe will need to act quickly to convince investors of his sincerity for economic restructuring, for a failure to do
so would raise question marks about whether Japan can reform at all or is doomed to stagnate indefinitely.
Table: Politica l Overview
Long-Term Political Outlook
Abe And LDP Face Colossal Challenges In 2015-2024
Prime Minister Shinzo Abe and his Liberal Democratic Party are unlikely to deliver a sustainable recovery of the Japanese economy
and address the country's structural woes. These include a colossal national debt burden, demographic decline and the loss of
competitiveness of Japan's key industries. There is a high risk of a fiscal crisis before the end of the 2010s and the LDP's eventual
replacement by new political forces.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Oil Price Fall Will Support But Not Cure Economy
We continue to see real GDP growth coming in at 0.8% in 2015, marking an uptick from an estimated 0.3% in 2014, but disappointing
consensus expectations of 1.0%. While the collapse in oil prices will provide support to the economy through a greatly improved terms
of trade picture, structural factors will continue to undermine growth.
TABLE : Ec onomic Acti vit y
Monetary Policy
More Quantitative Easing Raises Long-Term Stagflation Risks
As we previously anticipated, Japanese policymakers are seeking once again to create inflation as a means of boosting economic
growth. While the collapse in oil prices will cause inflation to fall in 2015, greater monetary easing increases the likelihood of high
inflation over the coming years.
Table: Moneta ry Polic y
Fiscal Policy
BoJ Drives A Shift In Risks For The Banking System
In an effort to drive down bond yields and spur bank lending, th e Bank of Japan (BoJ)'s extraordinary monetary policy has resulted in
a reduction of traditional risks facing banks. However, new risks have also emerged.
Table: Fisca l Polic y
Exchange Rate Forecast
JPY: Still Difficult To Like, Despite The Sell-Off
With the yen down 37% over the past three years against the US dollar despite there having been effectively no difference in domestic
price growth between Japan and the US, a bullish medium-term case could be made. However, despite the sell-off, the yen is by no
means extremely cheap and the current policy direction will make it difficult for the yen to experience any meaningful appreciation. As
such, we hold a neutral view on the currency.
Table: CURREN CY FORE CAST
Table: Excha nge Rat e
Table: Current Acc ount
Chapter 3: 10-Year Forecast
The Japanese Economy To 2024
Three Barriers To Growth
There are three important factors that stand in the way of Japan achieving anything other than meagre real GDP growth over the coming
decade. These closely related factors suggest to us that real GDP growth will average around 0.7% per annum over the next decade. A
fiscal crisis, which would lead to rapidly rising interest rates, is by far the most salient threat to growth, although it could be argued that
an economic crisis could be a necessary evil to trigger a boost in private sector growth dynamism.
Table: Long-Term Mac roeconomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
tABLE : Developed Stat es – Lab our Market Ris k
Table: Developed Stat es – Logistics Ris k
Table: Developed Stat es – Crim e And Secu rit y Ris k
Table: Developed Stat es – Trad e And Investm ent Ris k
Chapter 5: Key Sectors
Autos
Table: Aut os Tota l Market – Hist orica l Data And Forecasts
Food & Drink
Table: Food Consumpti on Indicators – Hist orica l Data & Forecasts
Table: Alcoholic Drinks Va lue/Volum e Sales, Producti on & Trad e – Hist orica l Data & Forecasts
Table: Mas Grocery Retai l Sales By Format – Hist orica l Data & Forecasts
Other Key Sectors
Table: Oi l and Gas Sector Key Indicators
Table: Pha rma Sector Key Indicators
Table: Infrast ructu re Sector Key Indicators
Table: Telecoms Sector Key Indicators
Table: Defence and Secu rit y Sector Key Indicators
Table: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Globa l Assumptions
Table: Developed Stat es, Real GDP GrowtH, %
Table: BMI VER SUS BLO MBER G CON SEN SUS RE AL GDP GROW TH FORE CASTS, %
Table: Em ergi ng Markets , Real GDP Growth , %

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