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Analysts at Nomura note that the latest statistics show that Japan’s real GDP growth in FY17 came to 1.5%, and Nomura now projects growth of 0.9% in FY18 and 0.8% in FY19.

Key Quotes

“Compared with the forecasts we issued on 19 March, we lower our FY18 growth estimate by 0.3ppt and our FY19 projection by 0.1ppt. We cut our real GDP growth forecast for FY18 mainly because of the underwhelming real growth estimate for Q1 (the first q-q decline for nine quarters) and the associated carryover effect on growth in FY18 as a whole.”

Momentum matters more than growth

  • We attribute the negative growth in Q1 to one-time factors including unfavorable weather in Japan and a temporary economic slowdown overseas. We expect the dropout of these factors to bring about a return to sustained positive (if modest) growth in Q2 (Apr-Jun) onward. Although the sustainability of economic growth will be important, the strength of momentum behind that growth will matter more, in our view.
  • We project a moderate slowdown in Japanese real exports as a result of a gradual slowdown in the Chinese economy””which previously has driven the global economy””and a related loss of steam in global economic growth. Meanwhile, we think growth in consumer spending and other household demand is likely to remain weak.
  • Despite persistent tightness in labor supply-demand, the pace of wage growth is only picking up slowly, and we view the improvement in household income conditions as insufficient for an uptick in momentum. Overall, we think there is unlikely to be enough of an acceleration in domestic demand to maintain or increase economic growth.”

Price stability target looks out of reach even with the hike to our crude oil price assumption

We have revised up our inflation forecasts to reflect a change in our crude oil price assumption following recent sharp rises. We now forecast core CPI inflation (general CPI excluding fresh food) of 1.2% y-y in FY18 (0.2ppt higher than our previous forecast) and 0.8% in FY19 (0.1ppt higher than our previous forecast).”

Monetary policy likely to remain unchanged, in our view

Given that the price stability target is likely to remain elusive, we think it unlikely that the Bank of Japan (BOJ) will change tack in its current monetary easing policy””by hiking its interest rate target, for example””within our forecast horizon.”