Nomura

Japanese economy to remain at low ebb

Our main scenario is that recession and additional policy response will be avoided

  • We revisit outlook for the Japanese economy in FY19 and FY20 following the release of the first set of preliminary GDP estimates for 2019 Q1
  • We maintain the real GDP growth forecasts of 0.2% in FY19 and 0.6% FY20, unchanged from our previous forecasts in March
  • Our main scenario is that recession as well as additional policy response will be avoided

Expecting recession to be avoided

We revisit our outlook for the Japanese economy in FY19 and FY20 following the release of the first set of preliminary GDP estimates for 2019 Q1. Our real GDP growth forecast calls for growth of 0.2% in FY19 and 0.6% in FY20, versus 0.6% in FY18, both of which are unchanged from our previous forecasts as of 8 March. In the wake of the sharp slowdown in the economy seen since the start of 2019, some commentators have started to express concerns that the Japanese economy may have entered a recession. In our view, the economy will gradually pick up from 2019 Q2. We see little possibility that Japan's recent phase of economic growth was interrupted in January 2019 before it had reached the same length as the Izanami Boom, the longest period of economic expansion in Japan's postwar history, or that it was interrupted after reaching a new postwar record.

We see Japanese economy remaining at a low ebb

Although our forecasts indicate that we expect stronger real growth in FY20 than in FY19, the level we forecast is slightly lower than the Japanese economy’s estimated potential growth rate of somewhere between 0.5% and 1%. In our view, real exports, which are the driving force behind the formation of economic cycles in the Japanese economy, will be very slow to pick up, reflecting in part the renewed trade war that erupted between the US and China in the wake of the US imposing further tariffs on China in early May (after the Golden Week holiday period in Japan). We expect real capex in Japan to be supported by spending on labor-saving measures and efficiency improvements to help cope with labor shortages, and household spending to be supported by the continued buoyant employment and income environment, with both holding firm. That said, we believe private-sector demand in Japan will lack the strength needed to accelerate the pace of the economy as a whole, and we thus think the economy will have to continue to relay on government demand, and more specifically on real public investment.

Price momentum on a downward trajectory

We expect inflation momentum to move onto a downward trajectory owing to a slow improvement in the output gap resulting from weak economic growth. We estimate that core CPI inflation (which excludes fresh food), including the consumption tax hike and the provision of free schooling, will come in at 0.6% y-y in FY19 and 0.5% in FY20, thus remaining around the 0.5% mark.

Our main scenario is that the government will avoid implementing additional stimulus measures

On the basis of the assumptions for the real economy and prices set out above, we think it reasonable to take the view that additional monetary easing will be avoided and the government will not postpone the consumption tax hike in order to support the economy. However, the increased uncertainty surrounding the global economic outlook, including the recent resurgence of US-China trade friction, means that if share prices were to correct sharply or yen appreciation were to pick up speed again, it could lead to risk-averse behavior on global financial markets. We cannot entirely rule out the possibility that the government might take action, including postponing the consumption tax hike, in the case of such financial market turmoil.

Read the full report or click here for more of Takashi Miwa’s views on Japan.

Contributor

  • Takashi Miwa

    Chief Japan Economist

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