Japan outlook 2019: gradual economic slowdown to continue

  • Our main scenario involves continued gradual economic slowdown led by external demand
  • We expect inflation to slow down in H2 onwards

In 2019, we expect the Japanese economy to continue towards a gradual economic slowdown led by a global economic deceleration and a slowdown in external demand that reflects it.

The Chinese economy, which is where the weakening of external demand started, may see a big deceleration in H1 2019 when last-minute rebound towards US raising and imposition of sanctions tariffs will appear, while there is a possibility that it may stabilize in H2 due to support by factors such as the self-sustained recovery of the IT sector's production cycle. However, it is unlikely that Japan's real exports will move towards recovery because (1) the US fiscal stimulus effect will peel off and (2) there are concerns over the downturn of capital expenditure of high-tech manufacturers involving Made in China 2025, faced with the hardline attitude of the US.

We estimate the depression of real consumer spending resulting from the consumption tax hike scheduled for October 2019 will be limited to around 0.1pp per annum due to effects of the introduction of reduced tax rates for products including food, the mitigation of impact because of a shift to free pre-school education, and reactionary measures such as point redemption plans. On the other hand, sluggish wage growth and underlying weakness in consumer demand caused by lower purchasing power of households are highly likely to continue.

The continued slowdown of the economy and the underlying weakness of consumer demand are likely to lower underlying inflation. Especially in H2 onwards, when the uplifting of energy reflecting higher crude oil prices and the weaker yen as well as the recovery of prices of imported durable goods will wear off, we expect core (general, excluding fresh food; excluding the impact of consumption tax hike) inflation to drop towards around 0.5% y-o-y. It is possible that the impact of making pre-school education free and lowering mobile phone charges, which we have not factored in in our forecasts, could temporarily raise the rate.

For more details on the outlook for Japan, please read Global Annual Economic Outlook.


  • Takashi Miwa

    Chief Japan Economist

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