Takashi Miwa, Nomura's Chief Economist for Japan, expect the Japanese economy to continue recovery albeit at slower tempo: macro policy debate likely to fade.

We have raised our FY17 and FY18 growth forecasts, but expect pace to slacken to potential growth rate level in FY19

In view of the strength of economic momentum since the beginning of the year we have raised our growth forecasts for the Japanese economy to 1.7% y-y for FY17 and 0.7% for FY18 (representing upward revisions of 0.4ppt and 0.2ppt, respectively, versus our forecasts as of 8 March). We have also issued our first real GDP growth forecast for FY19, at 0.6%, the same level as the potential growth rate.

We still expect slower pace of growth, but look for structural boost to capex

However, we have not made any major changes to our fundamental assessment of the overall economic outlook since we issued our previous projections. We expect the Japanese economy to continue to enjoy a relatively long-lived recovery, driven largely by exports. However, we think the recovery will gradually lose steam because of (1) a decline in momentum for the cyclical recovery in external demand, which is mainly occurring in China and elsewhere in Asia, and (2) a slowdown in real incomes and spending as inflation gradually gathers pace amid sluggish wage growth.

We expect the underlying trend in domestic corporate capex to move in line with momentum in the economy as a whole, centered on exports. At the same time, however, we think that the worsening of the labor shortage caused by a structural tightening in supply-demand on the labor market as a result of societal aging and a declining birthrate is likely to boost capex for structural reasons, as corporations further step up labor-saving investment and speed up the development of labor-saving technology.

 The shift from expansion to recovery and fiscal/monetary policy

If real GDP growth shifts from expansion (clearly exceeding the potential growth rate) to recovery (around the same level as the potential growth rate), we think it highly likely that the consumption tax hike scheduled for October 2019 will be postponed once again owing to political considerations, bearing in mind the sharp economic slowdown that occurred in the wake of the 2014 consumption tax hike. Moreover, if the pace of economic recovery slows to a level roughly in line with the potential growth rate in 2018 through 2019, the boost toward achieving the price stability target of inflation of 2% provided by the recovery will likely decline too. On a fiscal year-average basis, we forecast core CPI inflation of 0.6% for FY17, 0.6% for FY18, and 0.3% for FY19. We also expect strong speculation about the normalization of monetary policy to fade from the picture.

At the same time, even if the pace of economic expansion slows, as long as the recovery trend continues we think it unlikely that the Japanese authorities will move to a more aggressive policy stance. For now we think that arguments for traditional macroeconomic policy are unlikely to become a key theme in the markets.


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