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Japan Country Risk Report Q2 2016

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

Core Views

Our real GDP growth forecast of 0.6% for 2016, compared with consensusexpectations of 1.1%, reflects our bearish view on externaldemand amid a continued unravelling of the Chinese economy andrenewed recession risks in the US, which look set to compound domesticstructural economic woes. Lower energy prices pose upside risks togrowth, should businesses use windfall profits to boost investment.The Bank of Japan’s latest monetary policy tweaks mark an incrementaleasing amid already extremely loose monetary policy. As debt continuesto be monetised, the money supply will rise, feeding through intohigher consumer price inflation following years of stagnating prices.

The FY2016 budget intends to narrow Japan’s fiscal deficit to 6.6% ofGDP, but continued supplementary budgets and weak GDP growthsuggest this will not be achieved. While total government debt as ashare of GDP is stabilising thanks to the Bank of Japan’s policies, therisk of a fiscal crisis in Japan over the coming years remains acute.Japan’s external accounts have been a major beneficiary of thedecline in global energy prices, with the trade account heading backto balance from a significant deficit and the current account surplussurging. However, this increased surplus partly reflects weakness indomestic investment as businesses have used the windfall of cheapenergy to increase overseas assets rather than domestic investment,which will prevent a broad-based recovery in the domestic economy.The dollar appears to be forming a significant topping pattern againstthe yen, with potential for significant yen strength over the first fewmonths of 2016. While there are clearly structural headwinds facingthe currency as a result of the huge fiscal deficit and likelihood of increaseddebt monetisation, the bullish medium-term case is becomingincreasingly visible.As Japan’s megabanks embark on aggressive sales of their crossshareholdingsin line with the government’s aims of improving corporategovernance, this will provide the dual benefit of improved capitalallocation and increased capital adequacy. Both of these factorssuggest that banking equities will outperform the broader marketover the medium term.Major Forecast ChangesWe have revised our forecast for the Japanese yen stronger due toa number of positive technical and fundamental factors, from fallingoil prices to our expectation of rising global risk aversion and thepotential for the US Federal Reserve to err on the side of caution withregards to interest rate hikes amid slowing US growth momentum.We now see the yen averaging JPY115.50/USD in 2016, expectingfurther appreciation from the 2015 average of JPY121.04/USD.

Table Of Contents

Japan Country Risk Report Q2 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Downbeat Growth Outlook Amid Growing External Risks8
Our real GDP growth forecast of 06% for 2016, compared with consensus expectations of 11%, reflects our bearish view on external
demand amid a continued unravelling of the Chinese economy and renewed recession risks in the US, which look set to compound
domestic structural economic woes That said, lower energy prices pose upside risks to growth, should businesses use windfall profits
to boost investment
GDP By Expenditure Outlook 9
TABLE: GDP GROWTH FORECASTS 9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS10
TABLE: NET EXPORTS FORECASTS 10
Monetary Policy 10
Latest BoJ Move Adds To Inflationary Potential10
The BoJ's latest monetary policy tweaks mark an incremental easing amid already extremely loose monetary policy in Japan As debt
continues to be monetised, the money supply will rise, feeding through into higher consumer price inflation following years of stagnating
prices
Monetary Policy Framework 11
Fiscal Policy And Public Debt Outlook 12
Ambitious 2016 Budget Is Little Cause For Cheer12
The FY2016 budget intends to narrow Japan's fiscal deficit to 66% of GDP, but continued supplementary budgets and weak real GDP
growth suggest this will not be achieved While total government debt as a share of GDP is stabilising thanks to the Bank of Japan's
policies, the risk of a fiscal crisis in Japan over the coming years remains acute
Structural Fiscal Position 14
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES14
External Trade And Investment Outlook 15
Terms Of Trade Windfall Boosts Savings But Not Investment15
Japan's external accounts have been a major beneficiary of the decline in global energy prices, with the trade account heading back
to balance from a significant deficit and the current account surplus surging However, this increased surplus partly reflects weakness
in domestic investment as businesses have used the windfall of cheap energy to increase overseas assets rather than domestic
investment, which will prevent a broad-based recovery in the domestic economy
Outlook On External Position 15
TABLE: MAIN EXPORT AND IMPORT PARTNERS16
TABLE: MAIN IMPORT AND EXPORTS16
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE 16
Currency Forecast 17
JPY: Bullish Case Growing Stronger17
The dollar appears to be forming a significant topping pattern against the yen, with potential for significant yen strength over the first few
months of 2016 While there are clearly structural headwinds facing the currency as a result of the huge fiscal deficit and likelihood of
increased debt monetisation, the bullish medium-term case is becoming increasingly visible
TABLE: BMI CURRENCY FORECAST17
Chapter 2: 10-Year Forecast 21
The Japanese Economy To 2025 21
Three Barriers To Growth21
There are three important factors that stand in the way of Japan achieving anything other than meagre real GDP growth over the coming
decade These closely related factors suggest to us that real GDP growth will average around 07% per annum over the next decade
A fiscal crisis, which would lead to rapidly rising interest rates, is by far the most salient threat to growth, although it could be argued that
an economic crisis could be a necessary evil to trigger a boost in private sector growth dynamism
TABLE: LONG-TERM MACROECONOMIC FORECASTS21
Chapter 3: Political Outlook 25
SWOT Analysis 25
BMI Political Risk Index 25
Short-Term Political Outlook 26
July 2016 Upper HouseElection Crucial For Abe26
Japan's July 2016 Upper House elections will be crucial for Prime Minister Shinzo Abe If the ruling coalition secures a two-thirds majority, it
will press ahead with a controversial constitutional amendment that would further expand Japan's military profile and de-prioritise
economic reforms
TABLE: POLITICAL OVERVIEW26
Long-Term Political Outlook 28
Abe And LDP Face Colossal Long-Term Challenges28
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
TABLE: DEVELOPED STATES - LABOUR MARKET RISK34
TABLE: DEVELOPED STATES - LOGISTICS RISK38
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK40
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK43
Chapter 5: BMI Global Macro Outlook 45
Global Macro Outlook 45
Unfinished Business In 201645
TABLE: GLOBAL ASSUMPTIONS45
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %46
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 46
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %47
TABLE: JAPAN - MACROECONOMIC DATA and FORECASTS49

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