Japan Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 48 pages

Core Views

There are few good options available to the Japanese government to address its ballooning debt load, but we believe that debt monetisation could prove to be the most costly in terms of its mediumterm economic impact. The government could find itself facing high inflation, stagnating economic activity, and rising pressure on bond yields if current policies persist. We maintain our bearish view on local assets given these growing risks.
Japan's Q413 GDP release does not make for optimistic reading. While real GDP came in at 1.0% q-o-q seasonally adjusted annualised, it marked the third consecutive quarter in which growth has slowed, showing the diminishing marginal returns of the ongoing monetary and fiscal stimulus measures. From a full-year 2013 growth rate of 1.6%, we expect to see a drop to 1.3% in 2014, which compares with consensus expectations of 1.5%. Even this relatively downbeat growth forecast faces serious downside risks.

Japan's trade figures for January missed expectations by a wide margin, with imports surging and exports stagnating. We expect to see the country record a current account deficit in 2014 as the weaker yen is insufficient to counteract the structural forces at play. Beyond 2014, the deficit is likely to widen as policies aimed at creating inflation will seriously undermine the domestic savings rate. Inflationary trends in Japan are picking up pace rapidly. This trend is one which is likely to remain in place over the medium term, and we could even see concerns arising that inflation is rising too rapidly before long. The decision by the Bank of Japan (BoJ) to explicitly target a 2.0% y-o-y inflation rate back in 2013, via increasing government bond monetisation market a major turning point for the economy's inflation outlook. While we have seen an increase in loan growth over the past 12 months, by far the largest increase in liquidity has been driven by the government spending via fiscal deficits.

Prime Minister Shinzo Abe will be forced to focus on economic issues rather than constitutional reform over the coming months, as the short-term benefits of 'Abenomics' wear off, and the public has shown little desire for amending the constitution. In addition, businesses and Abe's New Komeito coalition partner are likely to pressure him to deliver more economic reforms.

Major Forecast Changes

We have not made any significant changes to our forecasts for Japan's macroeconomic variables, other than to bump up our outlook for inflation in 2014, which we now see averaging 1.7% rather than 1.5%. From a qualitative perspective, however, we are noticing a number of inflationary trends (not least the bond market-implied inflation breakeven rates), which suggest to us that inflationary pressures are begging to mount under the surface.

Table Of Contents

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
Economic Agenda To Supersede Constitutional Change 8
Prime Minister Shinzo Abe will be forced to focus on economic issues rather than constitutional reform over the coming months, as the
short-term benefits of 'Abenomics' wear off, and the public has shown little desire for amending the constitution. In addition, businesses
and Abe's New Komeito coalition partner are likely to pressure him to deliver more economic reforms.
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 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Activity 14
GDP Figures Highlight Some Ominous Long-Term Trends 14
Japan's Q413 GDP release does not make for optimistic reading. While real GDP came in at 1.0% quarter-on-quarter seasonally
adjusted annualised, it marked the third consecutive quarter in which growth has slowed, showing the diminishing marginal returns of
the ongoing monetary and fiscal stimulus measures.
table: ECONOMIC ACTIVITY 14
Fiscal Policy 16
There are few good options available to the Japanese government to address its ballooning debt load, but we believe that debt
monetisation could prove to be the most costly in terms of its medium-term economic impact. The government could find itself facing
high inflation, stagnating economic activity, and rising pressure on bond yields if current policies persist. We maintain our bearish view
on local assets given these growing risks.
table: FISCAL POLICY 16
Monetary Policy 20
CPI Heading To 2.0% And Beyond 20
Inflationary trends in Japan are picking up pace rapidly. This trend is one which is likely to remain in place over the medium term,
and we could even see concerns arising that inflation is rising too rapidly before long. The decision by the Bank of Japan to explicitly
target a 2.0% year-on-year inflation rate back in 2013, via increasing government bond monetisation market a major turning point for
the economy's inflation outlook. While we have seen an increase in loan growth over the past 12 months, by far the largest increase in
liquidity has been driven by the government spending via fiscal deficits.
table: MONETARY POLICY 21
Balance Of Payments 22
Export Collapse Suggests Current Account Heading Into Deficit 22
Japan's trade figures for January missed expectations by a wide margin, with imports surging and exports stagnating. We expect to see
the country record a current account deficit in 2014 as the weaker yen is insufficient to counteract the structural forces at play. Beyond
2014, the deficit is likely to widen as policies aimed at creating inflation will seriously undermine the domestic savings rate.
table: CURENT ACOUNT 23
Chapter 3: 10-Year Forecast 25
The Japanese Economy To 2023 25
Three Barriers To Growth 25
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 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
Business Environment Outlook 30
Institutions 30
Tabl e: BMI Busin ess And Operation Risk Ratings 30
Infrastructure 31
Tabl e: BMI Legal Fram ewo rk Rating 32
Tabl e: Labou r Force Qualit y 33
Market Orientation 34
Table: Trade And Investment Ratings 34
TABLE: ASIA - ANUAL FDI INFLOWS 35
Chapter 5: Key Sectors 37
Defence 37
table: Defence Expenditure, 2010-2017 38
table: Road Freight, 2011-2018 40
table: Air Freight, 2011-2018 41
table: Rail Freight, 2011-2018 41
tabl e: Maritim e Freig ht-Throug hput ('000 ton es), 2011-2018 42
table: Trade Overview, 2011-2018 43
Other Key Sectors 45
Tabl e: Oil and Gas Secto r Key Indicato rs 45
tabl e: Telecoms Secto r Key Indicato rs 45
tabl e: Inf rast ructu re Secto r Key Indicato rs 45
tabl e: Pharma Secto r Key Indicato rs 46
tabl e: Food and Drink Secto r Key Indicato rs 46
tabl e: Food and Drink Secto r Key Indicato rs 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Chinese Economy Under Pressure 47
Table: Global Assumptions 47
Table: Developed States, Real GDP GrowtH, % 48
Table: BMI VERSUS BLOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, % 48
Tabl e: Em erging Markets , Real GDP Growt h, % 49

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