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Japan Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 47 pages

Core Views

With a strong mandate to pursue structural economic reform, the The Liberal Democratic Party of Japan (LDP) has a good opportunity to raise productivity and boost labour force participation. However, reform proposals, particularly relating to the labour market, appear to be missing the mark. With real GDP growth coming in below consensus at 0.2% q-o-q annualised in Q216, and recently-announced fiscal stimulus measures set to have a negligible impact on headline growth even in the short term, we maintain our 2016 and 2017 real GDP forecasts at 0.6% and 0.5%, respectively. The JPY/USD pair is currently testing support and option implied volatility markets suggest a significant move could be on its way. The yen is at a crossroads and is likely gearing up for a large move as its trading range contracts. Our fundamental bias is for the currency to head weaker due to further monetary easing and rising oil prices. Should the currency strengthen further in the near term, this would likely set the stage for more aggressive weakness over the medium term as it would prompt the Bank of Japan (BoJ) to aggressively ramp up its efforts to weaken the currency. We believe that inflation is bottoming out and should rise through to the end of the year and over 2017. The BoJ will likely be forced to increase its stimulus measures in order to keep bond yields from rising aggressively, which should begin to feed through to a weaker yen and higher inflation. While the country's large income account surplus is a major factor keeping inflation subdued, a declining national savings rate will ultimately undermine this surplus. While low oil prices have provided major support to the Japanese economy, they have been unable to allow the economy to escape its stagnation owing to several structural shortcomings. Furthermore, the low inflation readings that weak oil prices have caused have encouraged policymakers to expand monetary and fiscal policy under the mistaken belief that low inflation is the reason for the apparent economic weakness. We believe that this has further undermined Japan's economic potential, and left the economy increasingly at risk from a rise in oil prices. The Japanese government's stimulus package announced in early August will be much smaller than originally expected, which we see as positive for fiscal sustainability and medium term real GDP growth. However, there remains no appetite for much-needed fiscal austerity, and the government's share of GDP is set to continue rising to the detriment of the country's economic health. Major Forecast Changes We have not undertaken any significant forecast changes during this latest report. Despite the sharp drop in headline inflation, we maintain that inflationary pressures will rise over the coming quarters. Meanwhile, we remain bearish towards the yen on account of the increasing likelihood of further monetary easing.

Table Of Contents

Japan Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Major Forecast Changes.................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook ....................................................................................................................................... 8
Maintaining Weak Growth View Despite Fiscal Stimulus............................................................................................................8
With real GDP growth coming in below consensus at 0.2% q-o-q annualised in Q216, and recently-announced fiscal stimulus measures
set to have a negligible impact on headline growth even in the short term, we maintain our 2016 and 2017 real GDP forecasts at 0.6
%and 0.5%, respectively.
GDP By Expenditure Outlook.................................................................................................................................. 10
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Fiscal Policy And Public Debt Outlook ................................................................................................................. 11
Stimulus Package Smaller Than Expected But Still No Appetite For Austerity......................................................................11
The Japanese government's stimulus package announced in early August will be much smaller than originally expected, which we
see as positive for fiscal sustainability and medium term real GDP growth. However, there remains no appetite for much-needed fiscal
austerity, and the government's share of GDP is set to continue rising to the detriment of the country's economic health.
Structural Fiscal Position........................................................................................................................................ 12
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
External Trade And Investment Outlook ............................................................................................................... 13
Rising Oil Prices Pose The Largest Risk To Economy..............................................................................................................13
While low oil prices have provided major support to the Japanese economy, they have been unable to allow the economy to escape
its stagnation owing to several structural shortcomings. Furthermore, the low inflation readings that weak oil prices have caused have
encouraged policymakers to expand monetary and fiscal policy under the mistaken belief that low inflation is the reason for the apparent
economic weakness.
Outlook On External Position.................................................................................................................................. 14
TABLE: MAIN EXPORT AND IMPORT PARTNERS...............................................................................................................................................15
TABLE: MAIN IMPORT AND EXPORTS.................................................................................................................................................................15
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................15
TABLE: CURRENT ACCOUNT BALANCE FORECASTS.......................................................................................................................................16
Monetary Policy........................................................................................................................................................ 16
Inflation Bottoming Out................................................................................................................................................................16
We believe that inflation is bottoming out and should rise to 1.0% by the end of the year and 2.2% by end-2017. The BoJ will likely be
forced to increase its stimulus measures in order to keep bond yields from rising aggressively, which should begin to feed through to a
weaker yen and higher inflation.
Monetary Policy Framework.................................................................................................................................... 17
TABLE: MONETARY POLICY FORECASTS..........................................................................................................................................................17
Currency Forecast.................................................................................................................................................... 18
JPY: At A Crossroads...................................................................................................................................................................18
The yen is at a crossroads and is likely gearing up for a large move as its trading range contracts. Our fundamental bias is for the
currency to head weaker due to further monetary easing and rising oil prices.
TABLE: BMI CURRENCY FORECAST....................................................................................................................................................................18
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 just 0.7% real
GDP growth over the next decade.
TABLE: LONG-TERM MACROECONOMIC FORECASTS.....................................................................................................................................21
Chapter 3: Political Outlook................................................................................................................... 25
SWOT Analysis......................................................................................................................................................... 25
BMI Political Risk Index........................................................................................................................................... 25
Domestic Politics..................................................................................................................................................... 26
Abe's Third Arrow Likely To Miss The Mark...............................................................................................................................26
With a strong mandate to pursue structural econo mic reform, the LDP has a good opportunity to raise productivity and boost labour
force participation. However, reform proposals, particularly relating to the labour market, appear to be missing the mark.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................26
Long-Term Political Outlook................................................................................................................................... 27
Abe And LDP Face Colossal Long-Term Challenges................................................................................................................27
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................................................................................................................... 31
SWOT Analysis......................................................................................................................................................... 31
Operational Risk Index............................................................................................................................................ 31
Operational Risk....................................................................................................................................................... 32
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................32
TABLE: DEVELOPED STATES - LOGISTICS RISK..............................................................................................................................................35
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................38
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................40
Chapter 5: BMI Global Macro Outlook................................................................................................... 43
Global Macro Outlook.............................................................................................................................................. 43
Broad Recovery But Three Notes Of Caution.............................................................................................................................43
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................43
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %....................................................................................................................................44
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %...................................................................................................................................45
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................47

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