150923 japan watch

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Japan Watch

Group Economics Macro & Financial Markets Research Maritza Cabezas & Roy Teo

China a risk for Japan’s breakthrough?

+31 20 343 5618

23 September 2015 •

After a slow start this year, uncertainty related to the outlook for emerging markets will likely make consumers and corporates in Japan more cautious. A major concern for Japan’s export growth is the moderate growth in China. In light of developments, we are revising our GDP growth forecast to 0.7% from 1% in 2015, while in 2016 we expect GDP growth to be around 1%, down from 1.2%. This amounts to an even more modest recovery.

We maintain our view that inflation will undershoot the BoJ’s 2% target, rising only to around 1% in 2016. We expect additional monetary easing early next year in order for the BoJ to move towards its inflation target, but there is a risk that this could be sooner if the economy fails to pick up as expected.

Economy still waiting for a breakthrough…

slower pace. At the same time, consumer confidence is taking

We have been waiting for Japan to resume its recovery this

more time to recover than expected. We think that the slow

year, but the recovery continues to disappoint. We anticipated

start this year will not be fully compensated in the second half

stronger consumption growth as a result of lower oil prices,

given the uncertainty in emerging markets. And this uncertainty

while wage growth was expected to pick up on the back of

will likely make it more difficult for investors to realise their

record high corporate profits and a tight labour market. In the

intentions to expand capacity.

first half of the year, wage growth, private consumption and investment growth have been below expectations, while

…as risks increase for Japan’s external demand…

government consumption growth has had a positive impact.

A major concern for Japan’s export sector is the moderate

The slowdown in consumption can be partly explained by the

growth in China. Since the start of the year, exports to China

rising imported food prices due to the yen depreciation, which

have dropped considerably, mainly in the area of chemical

somewhat eroded purchasing power. In addition, real wage

products, business machinery, transportation equipment and

growth has not materially picked up.

metal products, which are closely related to the slowdown in China’s industrial sector. China’s importance to Japan’s

GDP growth shows slow recovery

exports is practically the same as US exports (a bit more than

% contribution

18%). If China’s slowdown spills over to the rest of Asia, this could deal a heavy blow to Japan’s external demand with

10

exports to Asia accounting for 54% of total exports. We expect

5

exports to grow only modestly as we have factored in a further 0

decline in export growth to China.

-5 -10 -15 -20 Q1 2012

Investment Government consumption Inventories Net exports Private consumption GDP growth Q1 2013

Q1 2014

Japan’s main trading partners % of total exports

20 Q1 2015

Source: Thomson Reuters Datastream

16 12 8

…while outlook grows more uncertain… Meanwhile, surveys suggest that corporates remain quite bullish about their investment plans. For instance, the Nikkei Japan manufacturing PMI pointed to a stronger improvement

4 0 US

China

EU

S. Hong Taiwan Other Other Korea Kong Asia

in operating conditions, with production and job creation increasing. In contrast new export orders has been rising at a

Source: Thomson Reuters Datastream


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