Our real GDP growth forecast of 0.6%, compared with consensus expectations of 1.1%, reflects our bearish view on external demand amid a continued unravelling of the Chinese economy and renewed recession risks in the US, which look set to compound domestic structural economic woes. That said, lower energy prices pose upside risks to growth, should businesses use windfall profits to boost investment.
The BoJ's latest monetary policy tweaks mark an incremental easing amid already extremely loose monetary policy in Japan. As debt continues to be monetised, the money supply will rise, feeding through into higher consumer price inflation following years of stagnating prices.
The FY2016 budget intends to narrow Japan's fiscal deficit to 6.6% of GDP, but continued supplementary budgets and weak real GDP growth suggest this will not be achieved. While total government debt as a share of GDP is stabilising thanks to the Bank of Japan's policies, the risk of a fiscal crisis in Japan over the coming years remains acute.
Japan's external accounts have been a major beneficiary of the decline in global energy prices, with the trade account heading back to balance from a significant deficit and the current account surplus surging. However, this increased surplus partly reflects weakness in domestic investment as businesses have used the windfall of cheap energy to increase overseas assets rather than domestic investment, which will prevent a broad-based recovery in the domestic economy.
The dollar appears to be forming a significant topping pattern against the yen, with potential for significant yen strength over the first few months of 2016. While there are clearly structural headwinds facing the currency as a result of the huge fiscal deficit and likelihood of increased debt monetisation, the bullish medium-term case is becoming increasingly visible.
As Japan's megabanks embark on aggressive sales of their cross-shareholdings in line with the government's aims of improving corporate governance, this will provide the dual benefit of improved capital allocation and increased capital adequacy. Both of these factors suggest that banking equities will outperform the broader market over the medium term.
Major Forecast Changes
We have revised our forecast for the Japanese yen stronger due to a number of positive technical and fundamental factors, from falling oil prices to our expectation of rising global risk aversion and the potential for the US Federal Reserve to err on the side of caution with regards to interest rate hikes amid slowing US growth momentum. We now see the yen averaging JPY115.50/USD in 2016, expecting further appreciation from the 2015 average of JPY121.04/USD.
The ongoing collapse in global energy prices provides a major upside risk to the Japanese economy. Over the past year, energy imports have fallen from 7.0% of GDP to just 3.0% of GDP, providing a windfall gain to Japanese businesses and consumers. Should we start to see business making use of the rise in corporate profits that have been partially driven by the fall in energy prices, then this could present major upside risks to growth.
On the downside, the ongoing quantitative easing programme, in combination with high levels of government spending, are undermining productive investment in the economy due to the distortion of interest rates. The risks is that real interest rates return to positive territory in a rapid fashion, which could result in large numbers of bankruptcies and leave the government in a difficult position to finance its huge debt burden.
|Real GDP growth, % y-o-y||0.0||0.7||0.6||0.7|
|Nominal GDP, USDbn||4,610.4||4,135.9||4,427.7||4,518.8|
|Consumer price inflation, % y-o-y, eop||2.4||1.1||2.2||2.5|
|Exchange rate JPY/USD, eop||119.78||117.00||115.50||116.66|
|Budget balance, % of GDP||-7.9||-7.8||-7.0||-7.1|
|Current account balance, % of GDP||0.5||2.3||2.1||1.9|
The Japan Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Japan. It is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.
An influential new analysis of Japan's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).
- Forecast the pace and stability of Japan's economic and industry growth through end-2019.
- Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
- Assess the critical shortcomings of the operating environment that pose hidden barriers and costs to corporate profitability.
- Contextualise Japan's country risks against regional peers using BMI's country comparative Risk Index system.
- Evaluate external threats to doing business in Japan, including currency volatility, the commodity price boom and protectionist policies.
BMI provides our fully independent 5-year forecasts for Japan through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.
Economic Outlook Contents
The Japan Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.
Key Areas Covered:
- Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
- BMI's comprehensive Risk Index system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.
- Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
- Balance of Payments - trade and investment, current and capital account.
- Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
- Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
- Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
- Foreign Direct Investment - approvals, inflows and climate.
- External Debt - debt profile (short and long-term plus public and private sector obligations).
- Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.
- Rely upon BMI's 100% independent forecast scenarios for Japan and underlying assumptions - we take no advertising and are privately-owned.
- Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Japan, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
- Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.
What are the political risks to doing business in Japan over the next 5-years?
BMI's Japan country Risk Index evaluates the short- and medium-term threats to political stability.
Political Outlook Contents
- SWOT Analysis for the Japan Market - Political Strengths, Weaknesses, Opportunities and Threats facing Japan.
- Political Stability and Risk Assessment - BMI's Risk Index assesses explicit short- and long-term risks to political stability; latest positioning and trends for Japan's risk are compared with regional and global averages.
- Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.
- Long-Term Political Outlook BMI examines the structural risks to the stability of Japan’s political system and the dominant public policy issues likely to affect decision-makers, and outlines scenarios for how the state could evolve in the medium to long term.
- Benchmark Japan's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
- Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
- Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.
What are the current operational risks and difficulties associated with doing business in Japan?
The Operational Risk section gives an evaluation of current risks and difficulties associated with operating in the market. It also provides a brief overview of the regional Operational Risk Index which benchmarks Japan against its neighbours.
Operational Risk Contents
The chapter provides a summary of the main threats in the country, within:
- Labour Market Risk (Education; Availability of Labour; and Labour Costs)
- Logistics Risk (Market Size and Utilities; Quality and Extent of the Transport Governance)
- Trade and Investment Risk (Economic Openness; Government Intervention; and Legal Risks)
- Crime and Security Risk (Crime; Terrorism; and Interstate Conflict risks).
Key Sector Outlook*
Which industry sectors in Japan will grow fastest, and where are the major investment opportunities in the market?
BMI identifies investment opportunities in Japan's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.
Key Areas Covered:
- Market Overview - Size and value of each industry, including recent sector developments and major industry key performance indicators (KPIs) that have impacted company performance.
- 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modelling technique, which incorporates key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across and within each industry.
- Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.
- Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
- Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.
*Not all Country Reports contain the Key Sector Outlook chapter. Please enquire above for more information.