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
2
China a risk for Japan’s breakthrough? –23 September 2015
Inflation remains subdued
…despite yen depreciation
% yoy excluding VAT hike
The depreciation of the yen has not given export growth the expected impulse. Export volumes have turned down since
2
April not only to Asia but also to the US. Net exports have subtracted -0.3pp and -1.1pp from GDP growth in the first and second quarters.
0 -1
Yen weakness failing to support export growth index
-2
120
70
110
80
100
90
90
100
80
110
70
120
depreciation
60
130 00
02
1
05
07
10
12
15
11
12 Core CPI (ex food)
13
14
15
Core core CPI (ex energy ex food)
Source: Thomson Reuters Datastream
Japanese yen stronger… In August, the Japanese yen strengthened from 125 to 116
Japan export volume (lhs)
against the US dollar due to safe haven flows. This was
Japan real effective exchange rate (rhs inverted)
triggered by weak economic data in China and a deterioration in global investor sentiment. As a result speculative short
Source: Thomson Reuters Datastream
positions in the yen have declined. Lower short term yields in the US due to a cautious Fed outlook in September also
Subdued inflation calls for more easing
supported the yen. However as risk sentiment improved in
A further decline in commodities prices and somewhat sluggish
September, the yen eased lower to current levels of around
domestic demand will lead to downward pressure on inflation
120.
rates in the coming quarters. Weak consumer spending may be discouraging firms from raising prices, which could
…but only for a while
eventually lead to lower prices. We anticipate that CPI inflation
In our view, we think that this correction (strength) in the yen is
will remain around 0% at the end of the year. This will make it
transitory and do expect the weak yen trend to resume. We
more difficult for the BoJ to reach the price stability target of
expect monetary divergence between the Fed and BoJ to
2% in the first half of 2016. By early 2016, pressure will build
remain a key driver for the direction of the yen. The recent
for the BoJ to maintain credibility in achieving the target, and
strength in the JPY nominal effective exchange rate will also
more stimulus should be on the way early next year. This will
provide more headwinds to the central bank's objective to
give the BoJ time to see how food prices develop, given their
inflate the economy. In addition, outward investment from
recent upward trend. There are risks, however, that the BoJ
domestic investors will also weigh on the yen. Indeed,
may introduce additional stimulus sooner if the economy
purchases of foreign bonds have resumed after a small
remains soft in the third quarter. Inflation excluding both food
reversal in the middle of August due to risk off mode in
and energy remains low at around 0.6%. Anchoring inflation
financial markets. We maintain our view that the yen will
expectations (which has been declining according to bond
decline towards 128 against the US dollar by the end of this
market measures), may also be a factor triggering further
year.
stimulus sooner than later. In addition we think that more efforts to raise labour supply, backed by further actions to raise wages and investment will also help boost confidence and domestic demand. This all is essential to lift growth.
3
China a risk for Japan’s breakthrough? –23 September 2015
Key forecasts for the economy of Japan GDP (% yoy) FY GDP (% yoy) CY CPI inflation ex-food (average % yoy) FY CPI inflation ex-food (average % yoy) CY Budget balance (% GDP) Government debt (% GDP) Current account (% GDP) Unemployment (%) 10Y rate (% end of period) USD/YEN (eop)
2013 2.1 1.6 0.8 0.4
2014e -0.9 -0.1 2.8 2.6
2015e 1.0 0.7 0.3 0.6
2016 e 1.4 1.2 1.3 1.0
-8.5 243 0.8
-7.7 247 0.5
-6.5 243 3.0
-6.3 240 3.5
4.0
3.7
3.6
3.4
0.7 103
0.3 120
0.7 128
1.0 135
(*) FY April-March CY calendar year Source: ABN AMRO Group Economics, Thomson Reuters Datastream
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