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Japan Country Risk Report Q4 2016

  • July 2016
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

The yen remains on an appreciating trend, but with recent strengthtaking the currency into overbought and overvalued territory, theBank of Japan (BoJ) is unlikely to allow the currency to appreciatemuch further, and we hold a neutral near-term view. The combinationof weak growth and high inflation relative to the US should drivemedium-term weakness, in spite of the country's huge external assetposition.Despite the strong Q116 real GDP growth figure, Japan's economyis unlikely to mount a sustainable recovery as the current policymix continues to undermine productivity. The BoJ will continue toease, likely cutting interest rates deeper into negative territory atits upcoming meeting, while fiscal stimulus spending will remainelevated, both to the detriment of private investment.The Japanese government's decision to delay its proposed sales taxhike until late-2019 shows the lack of willingness by policymakers totake necessary but painful steps to rectify the country's fiscal imbalances.This, combined with the high likelihood of additional fiscalstimulus measures, will fail to support economic growth, increasegovernment bond issuance and necessitate a further expansionof quantitative easing. These developments will in turn give rise togrowing inflationary pressures and a weaker Japanese yen over themedium term.The recent rise in the yen has seen inflation expectations fall markedly.However, we continue to see medium-term inflation pressuresrising as the BoJ is forced to further expand its easing measures,leading to an acceleration in money supply growth, which is alreadygrowing at a solid pace.The ruling Liberal Democratic Party-Komeito coalition looks set toperform solidly in the July 10 upper house elections, despite growingcriticisms of the government. A clear coalition victory would reignitePrime Minister Shinzo Abe's 'Abenomics' reform programme, althoughAbe's advocacy of constitutional reform will remain highly divisiveover the medium term.Major Forecast ChangesWe have revised our forecast for the Japanese yen stronger followingthe surge seen in the first half of 2016. However, we believe thatthis strength could ultimately cause the BoJ to redouble its effortsat generating long-term inflation, and thus we maintain our bearishlong-term view on the currency.

Table Of Contents

Japan Country Risk Report Q4 2016
Executive Summary. 5
Core Views5
Major Forecast Changes..5
Key Risks..5
Chapter 1: Economic Outlook 7
SWOT Analysis.. 7
BMI Economic Risk Index 7
Economic Growth Outlook. 8
GDP Beat To Prove Temporary8
Despite the strong Q116 real GDP growth figure, Japan's economy is unlikely to mount a sustainable recovery as the current policy
mix continues to undermine productivity. The BoJ will continue to ease, likely cutting interest rates deeper into negative territory at its
upcoming meeting, while fiscal stimulus spending will remain elevated, both to the detriment of private investment. We maintain our
bearish bias on the yen.
TABLE: GDP GROWTH FORECASTS..10
TABLE: PRIVATE CONSUMPTION FORECASTS..10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS.10
Fiscal Policy And Public Debt Outlook 11
Sales Tax Delay Another Blow To Economic Outlook11
The Japanese government's decision to delay its proposed sales tax hike until late-2019 shows the lack of willingness by policymakers
to take necessary but painful steps to rectify the country's fiscal imbalances. This, combined with the high likelihood of additional fiscal
stimulus measures, will fail to support economic growth, increase government bond issuance and necessitate a further expansion of
quantitative easing. These developments will in turn give rise to growing inflationary pressures and a weaker Japanese yen over the
medium term.
TABLE: NET EXPORTS FORECASTS..11
Structural Fiscal Position. 13
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES..13
External Trade And Investment Outlook. 14
Declining Competitiveness No Major Threat To Current Account Surplus..14
Japan's trade and current account surpluses have likely peaked and we expect the trade account to head back into deficit over the
coming quarters as the country's major terms of trade windfall reverses and recent yen strength weighs on competitiveness.
TABLE: FISCAL AND PUBLIC DEBT FORECASTS..14
Outlook On External Position. 15
TABLE: MAIN EXPORT AND IMPORT PARTNERS..15
TABLE: MAIN IMPORT AND EXPORTS..15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE..15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS16
Monetary Policy.. 17
Declining Inflation Expectations Unlikely To Last17
The recent rise in the yen has seen inflation expectations fall markedly. However, we continue to see medium term inflation pressures
rising as the BoJ is forced to further expand its easing measures, leading to an acceleration in money supply growth, which is already
growing at a solid pace.
Monetary Policy Framework 18
TABLE: MONETARY POLICY FORECASTS.18
Currency Forecast. 19
JPY: Safe Haven But For How Much Longer?.19
The yen remains on an appreciating trend but with recent strength taking the currency into overbought and overvalued territory, the BoJ
is unlikely to allow the currency to appreciate much further, and we hold a neutral near-term view. The combination of weak growth and
high inflation relative to the US should drive medium-term weakness, in spite of the country's huge external asset position.
TABLE: BMI CURRENCY FORECAST.. 19
Chapter 2: 10-Year Forecast. 21
The Japanese Economy To 2025. 21
Abenomics Hangover Only Just Beginning..21
We believe that the economic policies enacted under Prime Minister Shinzo Abe will condemn the Japanese economy to an average of
just 0.7% in real GDP growth over the next decade. The peak in GDP per capita in 2012 of USD46,800 will not be reached again until
2024, at which point we forecast the economy to have experienced a 30-year compound annual growth rate of just 0.4% in US dollar
terms.
TABLE: LONG-TERM MACROECONOMIC FORECASTS. 21
Chapter 3: Political Outlook. 25
SWOT Analysis 25
BMI Political Risk Index. 25
Domestic Politics.. 26
Upper House Elections Crucial For Abenomics.26
The ruling Liberal Democratic Party-Komeito coalition looks set to perform solidly in the July 10 upper house elections, despite growing
criticisms of the government. A clear coalition victory would reignite Prime Minister Shinzo Abe's 'Abenomics' reform programme,
although Abe's advocacy of constitutional reform will remain highly divisive over the medium term.
TABLE: POLITICAL OVERVIEW.. 26
Long-Term Political Outlook.. 28
Abe And LDP Face Colossal Long-Term Challenges.28
Prime Minister Shinzo Abe and his Liberal Democratic Party (LDP) are unlikely 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. There is a high risk of a fiscal crisis before the end of the 2010s, and the LDP's eventual
replacement by new political forces.
Chapter 4: Operational Risk. 33
SWOT Analysis 33
Operational Risk Index.. 33
Operational Risk. 34
Labour Market Risk..34
TABLE: DEVELOPED STATES - LABOUR MARKET RISK..34
Logistics Risk..37
TABLE: DEVELOPED STATES - LOGISTICS RISK.38
Crime And Security Risk..40
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..41
Trade And Investment Risk.42
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK43
Chapter 5:BMI Global Macro Outlook. 45
Global Macro Outlook. 45
Brexit Risk Casts A Long Shadow..45
TABLE: GLOBAL ASSUMPTIONS..45
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %46
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %.. 47
MACROECONOMIC FORECAST. 49
TABLE: MACROECONOMIC DATA and FORECASTS. 49

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