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Analysts at Nomura are revising their outlook for the Japanese economy based on the first set of preliminary estimates for 2018 Q2 GDP announced on 10 August and now forecast real GDP growth of +0.8% y-y in FY18, +0.7% in FY19, and +0.7% in FY20.

Key Quotes

“We revise down our FY18 and FY19 forecasts by 0.2ppt and 0.1ppt, respectively, and leave our forecast for FY20 unchanged (our previous forecasts were as of 5 July 2018). The sharp cut to our FY18 forecast is based on the assumption of a relatively substantial slowdown in real exports in the near term.”

“As previously, we expect economic growth to continue to gradually slow through FY20, mainly due to external demand tracking global economic conditions. While a slowdown in real exports and production generally leads to slower improvement in employment conditions, we believe that the underlying labor supply-demand balance is likely to remain tight due in part to demographic changes. That said, we believe that real consumption is likely to remain weak, with tight labor supply-demand conditions continuing to do little to push up wages.”

Growing downside risks

Although we expect growth to gradually weaken, we expect real capex to expand at a healthy rate thanks to (1) solid demand/production at domestic production equipment manufacturers buoyed by the global trend toward automating manufacturing processes, (2) strong demand for labor-saving technologies due to labor shortages, and (3) hearty construction demand in urban areas.

On the other hand, we believe there is also a risk that the US Trump administration’s protectionist trade policies could put a damper on the corporate capex appetite worldwide. As a result, we must also keep in mind that this poses considerable downside risk to capex in Japan as well.”