Japan Business Forecast Report Q3 2013

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
Economy Still Key Issue For Upper House Elections
The Upper House election in July will be the next significant event in Japanese politics. It will determine the Abe administration's ability
to push through further economic reforms and even constitutional amendments.
TABLE: POLITICAL OVERVIEW 8
Long Term Political Outlook 10
Can Any Government Reverse National Decline?
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.
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
2013 Growth Upgraded At Expense Of Fiscal Stability
We believe that Prime Minister Shinzo Abe's direct approach in terms of encouraging wage increases and business spending is likely to
bolster growth in private consumption and investment in the near term.
TABLE: ECONOMIC ACTIVITY 14
Fiscal Policy 16
Debt Restructuring On The Cards As Yields Rise And Demand Wavers
The Bank of Japan's (BoJ) decision to aggressively purchase Japanese government bonds (JGB) has led to increased volatility and
rising yields across the debt curve. We see this as an ominous sign for the government's fiscal position, given its plans to issue almost
JPY160trn (35% of GDP) worth of bonds for FY2013 to cover maturing bonds and fiscal expenditures.
TABLE: FISCAL POLICY 16
Monetary Policy 18
Is This The Beginning Of The End?
In its latest meeting the Bank of Japan's (BoJ) policy board decided to employ extreme measures in a bid to stoke inflation, as
demanded by Prime Minister Shinzo Abe. With unanimous support to double the monetary base in two years, we believe the central
bank has shown that it will employ all its tools to achieve inflation, and is likely to 'succeed'. That said, we maintain our view that inflation
will not be beneficial to the economy, and believe that the latest steps of debt monetisation are likely to hasten the arrival of a debt
crisis.
TABLE: MONETARY POLICY 18
Balance Of Payments 19
Investment Repatriation Could Expedite Current Account Deficit
We believe that Japan's current account will record a smaller surplus in 2013, as growth in fuel imports continue to rise. Although strong
inward investment income has underpinned the surplus, mitigating the impact from trade deficits over the past two years, we believe
that the trend of investors repatriating their investments is likely to grow, suggesting that income receipts will provide less of a buffer to
mitigate trade deficits.
TABLE: CURRENT ACCOUNT 20
Immigration Is Key To Reviving Long-Term Growth
Immigration remains the most realistic way for Japan to overcome its long-term economic challenges. Regardless of how Prime Minister
Shinzo Abe's monetary and fiscal stimulus plays out, the country will face significant challenges from an ageing and shrinking population
over the coming decades. Opening the door to mass immigration is the most practical solution.
Chapter 3: 10-Year Forecast 27
The Japanese Economy To 2022 27
Three Barriers To Growth
Significant 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 1.1 % 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 is
a necessary evil to trigger a boost in private sector growth dynamism.
TABLE: LONG-TERM MACROECONOMIC FORECASTS 27
Chapter 4: Business Environment 31
SWOT Analysis 31
BMI Business Environment Risk Ratings 31
ST Business Environment 32
Hurdles Aplenty Despite Japan's TPP Interest
TABLE: IMPACT OF TPP ON SELECTED SECTORS IN JAPAN 32
Business Environment Outlook 34
Institutions 34
TABLE: BMI BUSINESS AND OPERATION RISK RATINGS 34
TABLE: BMI LEGAL FRAMEWORK RATING 35
Infrastructure 36
TABLE: LABOUR FORCE QUALITY 36
TABLE: TRADE AND INVESTMENT RATINGS 37
TABLE: ASIA - ANNUAL FDI INFLOWS 38
Market Orientation 39
Chapter 5: Key Sectors 41
Freight Transport 41
TABLE: AIR FREIGHT 42
TABLE: RAIL & ROAD FREIGHT 43
TABLE: MARITIME FREIGHT - THROUGHPUT ('000 TONNES) 44
Metals 45
TABLE: REFINED NICKEL PRODUCTION & CONSUMPTION ('000 TONNES, UNLESS STATED OTHERWISE) 46
TABLE: REFINED COPPER PRODUCTION & CONSUMPTION ('000 TONNES, UNLESS STATED OTHERWISE) 47
TABLE: STEEL PRODUCTION & CONSUMPTION ('000 TONNES, UNLESS STATED) 48
TABLE: REFINED ALUMINIUM PRODUCTION & CONSUMPTION FORECASTS ('000 TONNES) 48
Other Key Sectors 50
TABLE: INFRASTRUCTURE SECTOR KEY INDICATORS 50
TABLE: AUTOS SECTOR KEY INDICATORS 50
TABLE: PHARMA SECTOR KEY INDICATORS 50
TABLE: FOOD AND DRINK SECTOR KEY INDICATORS 51
TABLE: DEFENCE AND SECURITY SECTOR KEY INDICATORS 51
TABLE: TELECOMS SECTOR KEY INDICATORS 51
TABLE: FREIGHT SECTOR KEY INDICATORS 52
Chapter 6: BMI Global Assumptions 53
Global Outlook 53
Lowering Our US And Eurozone Growth Forecasts
TABLE: GLOBAL ASSUMPTIONS 53
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 54
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 54
TABLE: EMERGING MARKETS, REAL GDP GROWTH, % 55

Debt Market in Japan