Japan Country Risk Report Q2 2016
Our real GDP growth forecast of 0.6% for 2016, compared with consensusexpectations of 1.1%, reflects our bearish view on externaldemand amid a continued unravelling of the Chinese economy andrenewed recession risks in the US, which look set to compound domesticstructural economic woes. Lower energy prices pose upside risks togrowth, should businesses use windfall profits to boost investment.
The Bank of Japan’s latest monetary policy tweaks mark an incrementaleasing amid already extremely loose monetary policy. As debt continuesto be monetised, the money supply will rise, feeding through intohigher consumer price inflation following years of stagnating prices.
The FY2016 budget intends to narrow Japan’s fiscal deficit to 6.6% ofGDP, but continued supplementary budgets and weak GDP growthsuggest this will not be achieved. While total government debt as ashare of GDP is stabilising thanks to the Bank of Japan’s policies, therisk of a fiscal crisis in Japan over the coming years remains acute.
Japan’s external accounts have been a major beneficiary of thedecline in global energy prices, with the trade account heading backto balance from a significant deficit and the current account surplussurging. However, this increased surplus partly reflects weakness indomestic investment as businesses have used the windfall of cheapenergy to increase overseas assets rather than domestic investment,which will prevent a broad-based recovery in the domestic economy.
The dollar appears to be forming a significant topping pattern againstthe yen, with potential for significant yen strength over the first fewmonths of 2016. While there are clearly structural headwinds facingthe currency as a result of the huge fiscal deficit and likelihood of increaseddebt monetisation, the bullish medium-term case is becomingincreasingly visible.
As Japan’s megabanks embark on aggressive sales of their crossshareholdingsin line with the government’s aims of improving corporategovernance, this will provide the dual benefit of improved capitalallocation and increased capital adequacy. Both of these factorssuggest that banking equities will outperform the broader marketover the medium term.
We have revised our forecast for the Japanese yen stronger due toa number of positive technical and fundamental factors, from fallingoil prices to our expectation of rising global risk aversion and thepotential for the US Federal Reserve to err on the side of caution withregards to interest rate hikes amid slowing US growth momentum.
We now see the yen averaging JPY115.50/USD in 2016, expectingfurther appreciation from the 2015 average of JPY121.04/USD.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks
- Chapter 1: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Growth Outlook
- Downbeat Growth Outlook Amid Growing External Risks
- Our real GDP growth forecast of 0.6% for 2016, compared with consensus expectations of 1.1%, reflects our bearish view on external
- demand amid a continued unravelling of the Chinese economy and renewed recession risks in the US, which look set to compound
- domestic structural economic woes. That said, lower energy prices pose upside risks to growth, should businesses use windfall profits
- to boost investment.
- GDP By Expenditure Outlook
- TABLE: GDP GROWTH FORECASTS
- TABLE: PRIVATE CONSUMPTION FORECASTS
- TABLE: GOVERNMENT CONSUMPTION FORECASTS
- TABLE: FIXED INVESTMENT FORECASTS
- TABLE: NET EXPORTS FORECASTS
- Monetary Policy
- Latest BoJ Move Adds To Inflationary Potential
- The BoJ’s latest monetary policy tweaks mark an incremental easing amid already extremely loose monetary policy in Japan. As debt
- continues to be monetised, the money supply will rise, feeding through into higher consumer price inflation following years of stagnating
- Monetary Policy Framework
- Fiscal Policy And Public Debt Outlook
- Ambitious 2016 Budget Is Little Cause For Cheer
- The FY2016 budget intends to narrow Japan's fiscal deficit to 6.6% of GDP, but continued supplementary budgets and weak real GDP
- growth suggest this will not be achieved. While total government debt as a share of GDP is stabilising thanks to the Bank of Japan's
- policies, the risk of a fiscal crisis in Japan over the coming years remains acute.
- Structural Fiscal Position
- TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
- External Trade And Investment Outlook
- Terms Of Trade Windfall Boosts Savings But Not Investment
- Japan's external accounts have been a major beneficiary of the decline in global energy prices, with the trade account heading back
- to balance from a significant deficit and the current account surplus surging. However, this increased surplus partly reflects weakness
- in domestic investment as businesses have used the windfall of cheap energy to increase overseas assets rather than domestic
- investment, which will prevent a broad-based recovery in the domestic economy.
- Outlook On External Position
- TABLE: MAIN EXPORT AND IMPORT PARTNERS
- TABLE: MAIN IMPORT AND EXPORTS
- TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
- Currency Forecast
- JPY: Bullish Case Growing Stronger
- The dollar appears to be forming a significant topping pattern against the yen, with potential for significant yen strength over the first few
- months of 2016. While there are clearly structural headwinds facing the currency as a result of the huge fiscal deficit and likelihood of
- increased debt monetisation, the bullish medium-term case is becoming increasingly visible.
- TABLE: BMI CURRENCY FORECAST
- Chapter 2: 10-Year Forecast
- The Japanese Economy To 2025
- 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 MACROECONOMIC FORECASTS
- Chapter 3: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Short-Term Political Outlook
- July 2016 Upper HouseElection Crucial For Abe
- Japan’s July 2016 Upper House elections will be crucial for Prime Minister Shinzo Abe. If the ruling coalition secures a two-thirds majority, it
- will press ahead with a controversial constitutional amendment that would further expand Japan’s military profile and de-prioritise
- economic reforms.
- TABLE: POLITICAL OVERVIEW
- Long-Term Political Outlook
- Abe And LDP Face Colossal Long-Term Challenges
- Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) 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 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- TABLE: DEVELOPED STATES – LABOUR MARKET RISK
- TABLE: DEVELOPED STATES – LOGISTICS RISK
- TABLE: DEVELOPED STATES – CRIME AND SECURITY RISK
- TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
- Chapter 5: BMI Global Macro Outlook
- Global Macro Outlook
- Unfinished Business In 2016
- TABLE: GLOBAL ASSUMPTIONS
- TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
- TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
- TABLE: JAPAN - MACROECONOMIC DATA & FORECASTS