Japan Business Forecast Report Q2 2014

Date: January 28, 2014
Pages: 51
US$ 1,195.00
Report type: Strategic Report
Delivery: E-mail Delivery (PDF), Download
ID: J5C47407D6EEN

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Core Views

Japanese corporates continue to maintain a cautious stance despite the improvement in current business conditions. We do not expect many businesses to heed Prime Minister Shinzō Abe's calls to raise wages given the limited upside potential for profits. As such, together with the negative effects from the consumption tax hike and the rising import bill (due to the weakening currency), we project real GDP growth to slow to a subdued pace of 1.3% in 2014.

Even as Abe reiterates his pledge to maintain reform efforts to various sectors, we believe that actual implementation is still some way off. We believe that both the Bank of Japan (BoJ) and the government are likely to enact more expansionary policies (even though they will not produce any long-lasting or significant impacts) while reforms take a backseat.

We maintain our concerns with regards to the permanence and sustainability of 'Abenomics' and highlight the growing pressure on the BoJ to expand its monetary stimulus, both from an inflationary perspective as well as given the need to stabilise yields in the government bond market.

The massive changes in Japan's current account dynamics continue to push the country's current account balance towards zero and into the red beyond 2018. A downside risk to our current account forecast would be possible delays in Australian liquefied natural gas supply, which has so far suffered from cost overruns and shortages in skilled labour.

Long-term household savings rates will continue to decline as a progressively ageing society and a shift towards lower-paying contract (non-regular) employment forces more Japanese households to consume a greater proportion of their income. Consequently, this will place significant downward pressure on Japan's net international investment position, although a shift from positive to negative territory will very likely take more than 30 years.

We remain concerned about the increasing pressure on longer-dated interest rates. Higher inflation, together with a greying population, suggest that deposits will decline over time. Moreover, we maintain that the country's large stock of debt could be a destabilising force for both the economy and the banking system, especially since Japanese banks hold a significant portion of government bonds. Indeed, given that significant cuts to fiscal expenditure remain unlikely, a fiscal crisis, with more apparent monetisation of debt, looks increasingly unavoidable.

Major Forecast Changes

We have raised our estimate for 2013 real GDP growth, and now expect it to come in at 2.4% owing to stronger-than-expected private consumption growth over the first three quarters of the year.

We believe that the central bank is likely to ramp up its monetary stimulus sometime after the Q413 GDP print is released and around the time that fiscal year 2014 begins (April-March).

Key Risks To Outlook

The main risk to Japan's economy comes from a fiscal crisis that could result from the increase in debt issuance as welfare expenditures increase. The recent volatility in debt markets and the growing debt burden of the central government further highlight that the growing possibility of a failed bond auction could lead to a severe loss in confidence.

Another major risk to our economic outlook comes from a collapse in external demand as was seen during the height of the global financial crisis. This would come at the worst possible time for the economy, which is suffering from subdued domestic demand growth.

While unconventional quantitative easing, including the purchase of risk assets such as exchange-traded funds and real estate investment trusts, may help to stem deflation over the next few quarters or even years, the risk of the sudden onset of hyperinflation over the longer term has increased considerably. Indeed, the government is determined to push the BoJ to commit to indefinite easing and a 2.0% inflation target.
Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook


SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
Future Nuclear Policy Remains Mired In Uncertainty
Economic imperatives will very likely push the government to pursue nuclear plant restarts over the next two years. In the near term, we expect the government to succeed in bringing some reactors online, assuming that no drastic deterioration occurs in the Fukushima area. However, increasing uncertainties in the political sphere could present significant downside risks to the future direction of nuclear power in Japan's energy mix, and we present two possibilities that could emerge from the current situation.
  Table: Political Overview
Long-Term Political Outlook
Can Any Government Reverse National Decline?
Although the Liberal Democratic Party (LDP) won a landslide victory in the 2012 election, it is doubtful whether the party has the means 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. If the LDP fails to make progress, it risks paving the way for a fiscal crisis before the end of the 2010s, and its eventual replacement by new political forces.


SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Corporates To Remain Conservative Despite Better Conditions
Although the Bank of Japan (BoJ)'s Tankan survey in December 2013 reflected an increase in firms experiencing positive business conditions, few believed that these improvements would persist into the next quarter. This pessimistic outlook remains a key obstacle for Prime Minister Shinzō Abe, especially given that corporate Japan once again revised down its projected capital expenditure for fiscal year 2013. This suggests that an increase to workers' base wages is highly unlikely despite the Abe administration's numerous pleas to the business community. In our view, there is a possibility of private consumption contracting in 2014 as the consumption tax hike is implemented.
Fiscal Policy
Reduced Bond Issuance Built On Shaky Foundations
The Japanese legislature has adopted the largest ever fiscal budget for FY2014/15 (April-March), confirming, in our view, the lack of political will to undertake real steps towards fiscal consolidation. This leads us to maintain our bearish outlook for Japan's fiscal accounts and economy. We maintain that the government's revenue projections are too optimistic and that the reliance on increasing taxes, rather than curbing expenditure, will prove ineffectual in reining in the budget deficit. We further note that the supportive forces from the Bank of Japan's easing mandate may be not be sufficient as structural and market conditions come to the fore.
Monetary Policy
Growing Pressure From All Sides To Force BoJ To Raise JGB Purchases
In view of the slow pickup in core consumer price inflation and weakening economic growth, we believe that the Bank of Japan (BoJ) will be forced to expand its easing measures in 2014 to signal its commitment to its 2% inflation target. Even if inflation pressure does start to materialise, the fiscal trajectory and the likely offloading of private sector holdings suggest that the central bank will have to buy an ever-greater amount of public debt, which inevitably will lead to monetisation of the government's colossal debt load. We maintain that the BoJ's inflationary policies will not fix the economy's problems, but rather hasten the need for some form of debt restructuring.
Balance Of Payments
Structural Factors To Drive Further Surplus Declines
We maintain a dim outlook on Japan's external balances, as we see a host of short- and long-term factors that will continue to erode its current account surplus. We forecast the surplus to narrow to 0.5% of GDP in 2014, from an estimated surplus of 0.6% of GDP in 2013. In 2014, we believe that there is little room for the weakening yen to sustain export expansion at the pace recorded in 2013, as much of the low-hanging fruit has been picked. Meanwhile, structural factors, such as the aging population, will continue to pose downward pressure on the income account, although the recovery in global markets in 2014 will mitigate some of these forces.


The Japanese Economy To 2023
Three Barriers To Growth
Important factors 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 1.2 % per annum over the next decade. A fiscal crisis, which would lead to 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


SWOT Analysis
BMI Business Environment Risk Ratings
Investment Climate
Conservatism Warranted Despite Positive Agricultural Reform Attempts
Japanese Prime Minister Shinzō Abe's administration announced on November 26 2013 agricultural reforms that include the abolishment of the country's 40-year-old 'gentan' price support system. This surprised many observers. Indeed, we note that if these changes to the legislation are passed by the Diet, it would represent a significant positive for the sector and economy as a whole. That said, while there is room for improvements to happen on the back of these reforms, and even boost momentum in trade negotiations, we believe that significant obstacles to the implementation of these reforms mean we maintain our conservative outlook on the agriculture sector as well as the wider economy.
Business Environment Outlook
Table : BMI Business And Operation Ris k Ratings
  Table: BMI Legal Framework Rating
  Table: Labour Force Quality
Market Orientation
Table : Trade And Investment Ratings


  Table: Autos Total Mar ket – Historical Data And Forecasts
Food & Drink
  Table: Food Consumption Indicators – Historical Data & Forecasts , 2010-2017
  Table: Alcoholic Drin ks Value /Volume Sales – Historical Data & Forecasts , 2010-2017
  Table: Mass Grocery Retail Sales By Value – Historical Data & Forecasts , 2010-2017
Other Key Sectors
Table : Pharma Sector Key Indicators
Table : Oil & Gas Sector Key Indicators
  Table: Defence & Security Sector Key Indicators
  Table: Telecoms Sector Key Indicators
  Table: Freight Key Indicators


Global Outlook
Momentum To Continue In H114
Table : Global Assumptions
  Table: Developed States, Real GDP GrowtH, %
Table : Emerging Mar kets , Real GDP Growth , %
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