Japanese economy: Bye-bye to Goldilocks? – Nomura

Analysts at Nomura now project real GDP growth in Japan of 1.6% y-y in FY17, 1.4% in FY18, and 0.8% in FY19.

Key Quotes

“We raise our outlook mainly to reflect the sharp increase in US federal spending in the budget deal passed by Congress on 9 February. Our US analyst team responded to this news by upgrading its US economic outlook.”

“Solid external demand leads to robust capex in Japan too

We think Japanese real exports will continue to grow strongly through to at least summer 2018, supported by US demand that is likely to receive a further boost from sharp increases in Federal expenditure. We think capex will drive the Japanese economy, taking the form of increased investment at nonmanufacturers to tackle labor shortages as well as capex at manufacturers in response to growth in export volumes.”

“Pace of growth in real consumer spending still only gradual

The boost to Japanese output from increased exports has led to sustained improvement in employment conditions and helped to support growth in household incomes. However, we think growth in household incomes and real consumer spending is likely to remain modest because job momentum will probably peak out through FY19, as the economy slows as a whole, and the 2018 spring wage negotiations are likely to result in only a slight y-y improvement in base pay despite the government calling for a 3% hike in wages. We continue to assume that the hike to the consumption tax rate currently scheduled for October 2019 will be pushed back based on political considerations, mainly due to the slow pace of growth in household demand.”

“2% inflation target yet to be achieved; Goldilocks economic conditions ongoing

Improved growth prospects through FY19 should strengthen upward inflationary pressure as the pace of improvement in the output gap accelerates. However, household income and spending trends are not that strong, and we therefore think y-y growth in core CPI (nationwide CPI excluding fresh food) will hit 1.2% in 2018 Q3 (Jul– Sep) before gradually slowing again on the disappearance of inflationary boosts from energy prices. For the Japanese economy, we look for ongoing Goldilocks economic conditions—a combination of steady economic expansion and low inflation.”