We expect Japan to remain on a path of “steady but slow” economic growth in 2020 — weathering the shock of a recent consumption tax hike — as the government opens the taps on spending, the global economic slowdown bottoms out, and a weakening yen helps manufacturers ride an upswing in overseas demand.
That was the outlook presented by Nomura Chief Economist Takashi Miwa at the Nomura Investment Forum 2019 in Tokyo. As prospects for the global economy brighten, “many in the market already perceive that the cyclical part of the recent slowdown phase of the global economy is almost finished,” he said. “So (for Japan) the topic in the market should be cyclically sensitive sectors and export-oriented manufacturers.”
Cautious optimism amid risk factors
To be sure, downside risks abound, both globally and local to Japan, making next year particularly difficult to forecast. The US-China trade war, Brexit, and the US presidential election all loom large as potential landmines for Japan and the global economy. Also, business sentiment has been slumping, with the most recent Tankan survey near six-year lows. 
However, green shoots in the global economy provide scope for cautious optimism, according to Miwa, who discounts fears that Japan’s October consumption tax hike from 8% to 10% may choke off economic growth.
Japan’s extremely tight labor market — unemployment stands at 2.4%  — means “income conditions for Japanese households are very favorable,” he said. Moreover, Japan is going ahead with a massive fiscal stimulus package worth USD120 billion  - one of the largest fiscal boosts since the 2008 global financial crisis - to sustain the fragile growth.
“I don’t think the consumption tax shock will be a major factor for Japanese economic growth in the next year,” Miwa said. “The Japanese government is taking measures in a very comprehensive way. While Japan experiences slower growth, this kind of policy support will definitely be needed, and that’s what the government is trying to address.”
Weakening yen gives momentum
Japan’s economy can expect another positive jolt from a weakening yen in 2020, with the caveat that everything depends on the fate of global political flashpoints, Yujiro Goto, Nomura’s Head of FX Strategy, Japan, told the conference.
The exchange rate, according to Goto, is “at an important turning point.” Nomura expects the yen to decline to JPY112 by the end of next year from late 2019 levels of around JPY109.
Subsiding US-China tensions should exert upward pressure on the renminbi, and Goto pointed out that the Japanese yen is the only major currency that has a negative correlation to offshore renminbi (CNH). Overall, a more stable geopolitical environment lessens the need to flock to the yen as a safe haven. And, as the manufacturing cycle turns upward, global interest rates should follow it higher. Historically, Goto noted, turning points in the manufacturing cycle often coincide with turning points for the yen.
Even in the scenario of global risks re-emerging Nomura believes the Japanese currency could test JPY105 but not break JPY100. Japan has tools to deal with appreciation pressures on the yen, including the “Kuroda put” whereby the Bank of Japan increases expectations of monetary easing.
Miwa, however, cautioned that the Kuroda put may for now remain more words than action, since there are significant economic risks in pushing rates further below zero, particularly for Japan’s beleaguered banking industry, and forward guidance has, in any case, proven enough to influence markets.
Will brightening prospects foster a continued rally in Japanese equities? Japanese stocks have undoubtedly been catching up, with the TOPIX outperforming US, EU and Chinese markets since September. Yunosuke Ikeda, Nomura’s Chief Equity Strategist, pointed out it’s a rally that “has not been dependent on a weakening yen.”
But he cautioned that the global upturn may not be strong enough to “justify bullish TSE (Tokyo Stock Exchange) sentiment” — noting Japan equities are rising on valuations rather than performance. “In an environment where the economy has not warmed up sufficiently, and corporate earnings have not risen,” he said, “a valuations-driven equity rally seems too optimistic.”
Chief Japan Economist
Japan Equity Strategist
Head of FX Strategy, Japan