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Japan Business Forecast Report Q2 2014

  • January 2014
  • -
  • Business Monitor International
  • -
  • 51 pages

Core Views

Japanese corporates continue to maintain a cautious stance despite
the improvement in current business conditions. We do not expect
many businesses to heed Prime Minister Shinz? Abe's calls to raise
wages given the limited upside potential for profits. As such, together
with the negative effects from the consumption tax hike and the rising
import bill (due to the weakening currency), we project real GDP
growth to slow to a subdued pace of 1.3% in 2014.
Even as Abe reiterates his pledge to maintain reform efforts to various
sectors, we believe that actual implementation is still some way off.
We believe that both the Bank of Japan (BoJ) and the government
are likely to enact more expansionary policies (even though they will
not produce any long-lasting or significant impacts) while reforms
take a backseat.
We maintain our concerns with regards to the permanence and
sustainability of 'Abenomics' and highlight the growing pressure
on the BoJ to expand its monetary stimulus, both from an inflationary
perspective as well as given the need to stabilise yields in the
government bond market.
The massive changes in Japan's current account dynamics continue
to push the country's current account balance towards zero and
into the red beyond 2018. A downside risk to our current account
forecast would be possible delays in Australian liquefied natural gas
supply, which has so far suffered from cost overruns and shortages
in skilled labour.
Long-term household savings rates will continue to decline as a
progressively ageing society and a shift towards lower-paying contract
(non-regular) employment forces more Japanese households
to consume a greater proportion of their income. Consequently, this
will place significant downward pressure on Japan's net international
investment position, although a shift from positive to negative territory
will very likely take more than 30 years.
We remain concerned about the increasing pressure on longer-dated
interest rates. Higher inflation, together with a greying population,
suggest that deposits will decline over time. Moreover, we maintain
that the country's large stock of debt could be a destabilising force for
both the economy and the banking system, especially since Japanese
banks hold a significant portion of government bonds. Indeed, given
that significant cuts to fiscal expenditure remain unlikely, a fiscal
crisis, with more apparent monetisation of debt, looks increasingly

Major Forecast Changes

We have raised our estimate for 2013 real GDP growth, and now
expect it to come in at 2.4% owing to stronger-than-expected private
consumption growth over the first three quarters of the year.
We believe that the central bank is likely to ramp up its monetary
stimulus sometime after the Q413 GDP print is released and around
the time that fiscal year 2014 begins (April-March).

Key Risks To Outlook

The main risk to Japan's economy comes from a fiscal crisis that could
result from the increase in debt issuance as welfare expenditures
increase. The recent volatility in debt markets and the growing debt
burden of the central government further highlight that the growing
possibility of a failed bond auction could lead to a severe loss in
Another major risk to our economic outlook comes from a collapse in
external demand as was seen during the height of the global financial
crisis. This would come at the worst possible time for the economy,
which is suffering from subdued domestic demand growth.
While unconventional quantitative easing, including the purchase of
risk assets such as exchange-traded funds and real estate investment
trusts, may help to stem deflation over the next few quarters
or even years, the risk of the sudden onset of hyperinflation over the
longer term has increased considerably. Indeed, the government
is determined to push the BoJ to commit to indefinite easing and a
2.0% inflation target.

Table Of Contents

Japan Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Future Nuclear Policy Remains Mired In Uncertainty 8
Economic imperatives will very likely push the government to pursue nuclear plant restarts over the next two years In the near term,
we expect the government to succeed in bringing some reactors online, assuming that no drastic deterioration occurs in the Fukushima
area However, increasing uncertainties in the political sphere could present significant downside risks to the future direction of nuclear
power in Japan's energy mix, and we present two possibilities that could emerge from the current situation
Table: Political Overview 8
Long-Term Political Outlook 10
Can Any Government Reverse National Decline? 10
Although the Liberal Democratic Party (LDP) won a landslide victory in the 2012 election, it is doubtful whether the party has the means
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 If the LDP fails to make progress, it risks
paving the way for a fiscal crisis before the end of the 2010s, and its eventual replacement by new political forces
Chapter 2: Economic Outlook 15
SWOT Analysis 15
BMI Economic Risk Ratings 15
Economic Activity 16
Corporates To Remain Conservative Despite Better Conditions 16
Although the Bank of Japan (BoJ)'s Tankan survey in December 2013 reflected an increase in firms experiencing positive business
conditions, few believed that these improvements would persist into the next quarter This pessimistic outlook remains a key obstacle
for Prime Minister Shinz? Abe, especially given that corporate Japan once again revised down its projected capital expenditure for fiscal
year 2013 This suggests that an increase to workers' base wages is highly unlikely despite the Abe administration's numerous pleas
to the business community In our view, there is a possibility of private consumption contracting in 2014 as the consumption tax hike is
Fiscal Policy 17
Reduced Bond Issuance Built On Shaky Foundations 17
The Japanese legislature has adopted the largest ever fiscal budget for FY2014/15 (April-March), confirming, in our view, the lack of
political will to undertake real steps towards fiscal consolidation This leads us to maintain our bearish outlook for Japan's fiscal accounts
and economy We maintain that the government's revenue projections are too optimistic and that the reliance on increasing taxes, rather
than curbing expenditure, will prove ineffectual in reining in the budget deficit We further note that the supportive forces from the Bank
of Japan's easing mandate may be not be sufficient as structural and market conditions come to the fore
Monetary Policy 19
Growing Pressure From All Sides To Force BoJ To Raise JGB Purchases 19
In view of the slow pickup in core consumer price inflation and weakening economic growth, we believe that the Bank of Japan (BoJ) will
be forced to expand its easing measures in 2014 to signal its commitment to its 2% inflation target Even if inflation pressure does start
to materialise, the fiscal trajectory and the likely offloading of private sector holdings suggest that the central bank will have to buy an
ever-greater amount of public debt, which inevitably will lead to monetisation of the government's colossal debt load We maintain that
the BoJ's inflationary policies will not fix the economy's problems, but rather hasten the need for some form of debt restructuring
Balance Of Payments 22
Structural Factors To Drive Further Surplus Declines 22
Business Monitor International Ltd www businessmonitor com 3
We maintain a dim outlook on Japan's external balances, as we see a host of short- and long-term factors that will continue to erode its
current account surplus We forecast the surplus to narrow to 0 5% of GDP in 2014, from an estimated surplus of 0 6% of GDP in 2013
In 2014, we believe that there is little room for the weakening yen to sustain export expansion at the pace recorded in 2013, as much
of the low-hanging fruit has been picked Meanwhile, structural factors, such as the aging population, will continue to pose downward
pressure on the income account, although the recovery in global markets in 2014 will mitigate some of these forces
Chapter 3: 10-Year Forecast 25
The Japanese Economy To 2023 25
Three Barriers To Growth 25
Important factors 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 1 2 % per annum over the next decade A fiscal crisis,
which would lead to 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 Forecasts 25
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Investment Climate 30
Conservatism Warranted Despite Positive Agricultural Reform Attempts 30
Japanese Prime Minister Shinz? Abe's administration announced on November 26 2013 agricultural reforms that include the
abolishment of the country's 40-year-old 'gentan' price support system This surprised many observers Indeed, we note that if these
changes to the legislation are passed by the Diet, it would represent a significant positive for the sector and economy as a whole That
said, while there is room for improvements to happen on the back of these reforms, and even boost momentum in trade negotiations, we
believe that significant obstacles to the implementation of these reforms mean we maintain our conservative outlook on the agriculture
sector as well as the wider economy
Business Environment Outlook 32
Institutions 32
Table : BMI Business And Operation Ris k Ratings 33
Infrastructure 34
Table: BMI Legal Framework Rating 34
Table: Labour Force Quality 35
Market Orientation 36
Table : Trade And Investment Ratings 36
Chapter 5: Key Sectors 39
Autos 39
table : Autos Total Mar ket - Historical Data And Forecasts 40
Food and Drink 40
TABLE: Food Consumption Indicators - Historical Data and Forecasts , 2010-2017 42
TABLE: Alcoholic Drin ks Value /Volume Sales - Historical Data and Forecasts , 2010-2017 44
TABLE: Mass Grocery Retail Sales By Value - Historical Data and Forecasts , 2010-2017 45
Other Key Sectors 47
Table : Pharma Sector Key Indicators 47
Table : Oil and Gas Sector Key Indicators 47
table : Defence and Security Sector Key Indicators 48
table : Telecoms Sector Key Indicators 48
table : Freight Key Indicators 48
Chapter 6: BMI Global Assumptions 49
Global Outlook 49
Momentum To Continue In H114 49
Table : Global Assumptions 49
Table: Developed States, Real GDP GrowtH, % 50
Table : Emerging Mar kets , Real GDP Growth , % 51

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