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Monthly Economic Report March 16, 2017 Copyright Mizuho Research Institute Ltd. All Rights Reserved. 1. The Japanese Economy: moderate economic recovery. Clear corporate sector recovery in the Second Preliminary Quarterly Estimates of GDP Japan’s real GDP grew +0.3% q-o-q (+1.2% annualized) in the Oct-Dec quarter of 2016 (Second Preliminary Quarterly Estimates of GDP, the “2nd QE”), upwardly revised from the First Preliminary Quarterly Estimates of GDP (1st QE) (+1.0% annualized). Despite the downward revisions for inventory investment and public investment, capital investment was revised upward. Capital investment recorded the largest growth since the Jan-Mar quarter of 2014. Although there are lingering concerns about the strength of the recovery in personal consumption, the 2nd QE indicates that the economy is following a gradual recovery most notably in exports and capital investment, against a backdrop of the improvement of the overseas economies. [ Real GDP growth for Oct-Dec quarter of 2016 (2nd QE) ] 2015 Oct-Dec (Q-o-q % change) 1.5 Gross domestic product (GDP) Private capital investment (Q-o-q % change p.a.) Rate of real GDP growth 1.0 Households (Consumption + Housing) External demand 0.5 (Y-o-y % change) Domestic demand Private demand Personal consumption 0.0 Housing investment Capital investment Inventory investment - 0.5 Private inventory investment Public demand - 1.0 Q1 Q2 Q3 2015 Q4 Q1 Q2 Q3 2016 Q4 Public demand Government consumption Public investment Net exports of goods & services Exports Imports Source: Made by Mizuho Research Institute (MHRI) based upon Cabinet Office, National Accounts Nominal GDP GDP deflator (Y-o-y % change) - 0.2 - 1.0 1.1 - 0.3 (-0.3) - 0.5 (-0.3) - 0.6 - 1.0 0.1 (0.0) 0.3 (0.1) 0.7 - 1.3 (0.0) - 0.8 - 0.8 - 0.2 1.5 (Q-o-q % change) 2016 1st QE Jan-Mar Apr-Jun Jul-Sep Oct-Dec Oct-Dec 0.5 1.9 0.4 0.1 (0.1) - 0.1 (-0.1) 0.4 1.5 - 0.2 (-0.3) 0.9 (0.2) 1.3 - 1.2 (0.3) 0.9 - 1.1 0.7 0.9 0.5 2.2 0.9 0.6 (0.6) 1.0 (0.7) 0.2 3.3 1.4 (0.3) - 0.7 (-0.2) - 1.1 1.0 (-0.0) - 1.2 - 1.0 0.4 0.4 0.3 1.2 1.1 - 0.1 (-0.1) - 0.1 (-0.1) 0.3 2.4 - 0.1 (-0.3) 0.0 (0.0) 0.2 - 0.9 (0.4) 2.1 - 0.3 0.1 - 0.1 0.3 1.2 1.6 0.1 (0.1) 0.2 (0.1) 0.0 0.1 2.0 (-0.2) - 0.3 (-0.1) 0.3 - 2.5 (0.2) 2.6 1.3 0.4 - 0.1 0.2 1.0 1.7 - 0.0 (-0.0) 0.0 (0.0) - 0.0 0.2 0.9 (-0.1) - 0.0 (-0.0) 0.4 - 1.8 (0.2) 2.6 1.3 0.3 - 0.1 Note: The figures in ( ) indicate the contribution to changes in GDP Source: Made by MHRI based upon Cabinet Office, National Accounts 1 Exports and industrial production follow a recovery path despite a possible slowdown in the Jan-Mar quarter The export volume index (seasonally-adjusted by MHRI) stood at -0.4% m-o-m in January, declining for the second straight month. The pause in growth of US-bound automobile exports which had been strong in the Oct-Dec quarter, and the temporary impact of the Chinese New Year served to push down exports. Looking forward, exports should gradually pick up. The industrial production index stood at -0.8% m-o-m in January, falling into negative territory for the first time in six months. However, the industrial production index rose +0.2% from the Oct-Dec quarter, leading to our view that industrial production is continuing to pick up. Transport equipment, electronic parts & devices, general-purpose, production and business oriented machines contributed to the increase. [ Industrial production index (y-o-y % change in level of contribution) ] [ Export Volume Index by region ] (Y-o-y % change) (2010=100) World 115 6.0 US 110 EU 105 Asia Others Transport equipment Electronic parts & devices General-purpose, production and business oriented machinery Mining and manufacturing 4.0 2.0 100 95 0.0 90 - 2.0 85 - 4.0 80 75 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 (mmm-yy) Note: Seasonally-adjusted by MHRI Source: Made by MHRI based upon Ministry of Finance, Trade Statistics - 6.0 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 (mmm-yy) Source: Made by MHRI based upon Ministry of Economy, Trade and Industry, Indices of Industrial Production 2 Recovery in corporate profits. Recent increase in personal consumption According to the Financial Statements Statistics of Corporations by Industry, ordinary profits rose +16.9% y-o-y in the Oct-Dec quarter, revealing a substantial improvement. Petroleum & coal products and wholesale trade (including general trading companies) contributed to the increase due to factors such as unrealized profits on inventories generated by the recovery in commodity prices. Electrical machinery, equipment, and supplies and chemicals made a positive contribution due to factors such as the gradual recovery of the global economy and improvement of the global IT cycle. Real consumption expenditures (two-or-more person households, seasonally-adjusted) rose +0.5% m-o-m in January. Apart from a pause in the rise of fresh food prices, items such as furniture & household utensils, and clothing & footwear made a positive contribution. The impact of the rise of prices of daily goods caused by the weak yen will require monitoring. [ Ordinary profits (y-o-y % change in level of contribution) ] (2015=100) 106 (Y-o-y % change) Others Wholesale trade Electrical machinery, equipment and supplies Petroleum and coal products Chemicals All industries 25 20 15 [ Real consumption expenditures and real retail sales ] 104 Real retail sales 102 10 100 5 98 0 96 -5 Real consumption expenditures (Family Income and Expenditure Survey, two-or-more person households) 94 Oct-14 - 10 Apr-15 Oct-15 Apr-16 Oct-16 (mmm-yy) - 15 2015 2016 Source: Made by MHRI based upon Ministry of Finance, Financial Statements Statistics of Corporations by Industry (yyyy) Note: Seasonal-adjustment and inflation-adjustment of real retail sales by MHRI Source: Made by MHRI based upon Ministry of Economy, Trade and Industry, Current Survey of Commerce, and Ministry of Internal Affairs and Communications, Family Income & Expenditure Survey and Consumer Price Index 3 Given a low rate of increase in nominal wages, real wage growth is trending around zero% y-o-y In January, nominal wages (total earnings) grew +0.5% y-o-y and scheduled cash earnings rose +0.8% y-o-y. Hourly wages of part-time workers rose to +2.5% y-o-y reflecting the tight demand-supply of labour. On the other hand, wages for full-time employees remained lackluster. Growth in real wages has been virtually zero since October 2016 due to the recovery of prices. The rise of the consumer price index (general index excluding imputed rent) caused by the upturn of energy prices pushed down real wages. We forecast a moderate pace of increase in the consumer price index, which will curb real wage growth. [ Real wages ] [ Scheduled cash earnings by form of employment ] (Y-o-y % change) (Y-o-y % change) 3.0 3.0 Nominal wages Full-time employees Part-time employees (paid hourly) 2.0 2.5 Price factors Real wages 1.0 2.0 0.0 1.5 - 1.0 1.0 - 2.0 0.5 - 3.0 0.0 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 (mmm-yy) Note: When calculating each amount of earnings, the 2015 base index has been used so the figures may differ from publicly released data Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Monthly Labour Statistics - 4.0 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 (mmm-yy) Source: Made by MHRI based upon Ministry of Health, Labour and Welfare, Monthly Labour Statistics 4 Core CPI in positive territory for the first time in 13 months In January, nationwide core CPI (General Index excluding fresh food) rose +0.1% y-o-y, marking the first rise in 13 months. Apart from the ongoing contraction in the negative level for energy prices, the CPI was pushed up by clothing & footwear and reading & recreation. The underlying trend excluding energy prices is virtually zero% y-o-y, indicating that the CPI is bottoming out. The CPI (General Index excluding fresh food & energy), released for the first time from March, stood at +0.2% y-o-y (+0.1% y-o-y in December). We expect further increases in the positive core CPI due to the moderate recovery in energy prices and the weak yen. We forecast the boost from the rise of energy prices to continue for the rest of the year. [ Core CPI (y-o-y change) and monthly forecast ] [ Consumer Price Index ] Forecast (Y-o-y % change) (Y-o-y % change) 2.0 Feb 2018 +1.4% 1.4 Jan 2017 +0.1% 1.5 1.2 1.0 General ex. Fresh Food and Energy 0.8 0.6 1.0 0.5 General ex. Food (ex. alcohol) and Energy 0.4 0.2 0.0 0.0 - 0.5 - 0.2 US style core CPI General ex. Fresh Food - 0.4 - 1.0 Energy Food (ex. Fresh food and alcohol) General ex. Fresh Food - 0.6 Apr-15 Oct-15 Apr-16 Oct-16 (mmm-yy) Note: Excludes the impact of consumption tax hikes Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Consumer Price Index - 1.5 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 Jul-18 Jan-19 (mmm-yy) Note: Excludes the impact of consumption tax hikes Source: Made by MHRI based upon Ministry of Internal Affairs and Communications, Consumer Price Index 5 2. Japanese Monetary Policy: BOJ announces outright JGB purchase schedule. Reduced purchases in short-term zone The Bank of Japan (BOJ) left monetary policy unchanged at its March Monetary Policy Meeting (MPM) (March 15 and 16). The BOJ announced its March schedule for outright purchases of JGBs. The aim is to reduce the uncertainty about outright purchase operations. The size of outright purchases was reduced slightly for the short-term zone and for super long-term maturities longer than 25 years. The target interest rate for 10Y JGBs was maintained, and we forecast a gradual reduction in the total size of outright purchases. We expect current policy to be maintained while the BOJ will pay close attention to the US administration’s policy management and the political developments in Europe. Monetary policy is to be a point for discussion in the Japan-US economic dialogue scheduled to commence from April. We will closely monitor the course of discussion. [ BOJ JGB outright purchase plans ] [ Overview of the Japan-US Heads of State Meeting (economic issues) ] (100 million yen) Residual maturity Up to 1 year More than 1 year and up to 5 years March February 750 750 More than 1 year and up to 3 years 3,500 4,000 More than 3 years and up to 5 years 4,000 4,200 4,500 4,100 More than 10 years and up to 25 years 2,000 1,900 More than 25 years 1,000 1,100 More than 5 years and up to 10 years More than 10 years Note: The outright purchase amount is the median of the offer amount range for a single auction Source: Made by MHRI based upon Bank of Japan materials Reaffirmed their commitments to using the three-pronged approach of mutually-reinforcing fiscal, monetary, and structural policies to strengthen domestic and global economic demand. Emphasized that they remain fully committed to strengthening the economic relationships between their two countries and across the region, based on rules for free and fair trade. This will include setting high trade and investment standards, reducing market barriers, and enhancing opportunities for economic and job growth in the Asia-Pacific. Noting that the United States has withdrawn from the Trans-Pacific Partnership, the leaders pledged to explore how best to accomplish their shared objectives. This will include discussions between the United States and Japan on a bilateral framework as well as Japan continuing to advance regional progress on the basis of existing initiatives. Three areas will be tackled with the establishment of a new framework for economic dialogue headed by Deputy Prime Minister Aso and Vice President Pence: (1) macroeconomic policies such as fiscal and monetary policies (2) cooperation in areas such as infrastructure, energy, cyber and space issues, and (3) a framework for bilateral trade. Source: Made by MHRI based upon the Ministry of Foreign Affairs Japan-US Joint Statement, (February 10, 2017) and media reports 6 3. Japanese Long-term Yields: the rise in super long-term bond yields has recently paused 10Y JGB yields have been flat following the release of the BOJ’s schedule for outright purchases. The rise in super long-term bond yields has recently paused. On the other hand, yields in the short-term zone have fallen on the back of demand from foreign investors. The cost for dollar funding has been rising due to the wider differential in Japan-US market rates. Investors in medium- to long-term foreign bonds have been net sellers. We forecast JGB yields to remain low while we also monitor the trends in the BOJ’s outright purchase operations. We anticipate super long-term yields to remain susceptible to upward pressures. The trends of major investors up until January show that life insurance companies were limited in their net purchases of JGBs. The (median) forecast for 10Y JGB yields at the end of FY2017 is 0.15%, according to the bond market survey (February survey). The view is that the interest rate target will be raised in the second half of the year. [ JGB yields ] [ Dollar funding cost ] Fixed-rate BOJ Policy Board Meeting Operation (Nov 17) (Sep 21) (%) Fixed-rate Operation (Feb 3) 2.0 40Y (%) 1.9 1.7 1.5 1.5 20Y 1.0 1.3 Other 10Y 1.1 0.5 5Y 0.0 0.9 2Y 0.7 Japan-US Market Interest Rate Differential - 0.5 Sep Oct 2015 Nov Dec Jan Feb Mar Apr May Jun 2016 Source: Made by MHRI based upon Bloomberg Jul Aug Sep Oct Nov Dec Jan 2017 Feb Mar 0.5 Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17 (mmm-yy) Source: Made by MHRI based upon Bloomberg 7 4. Foreign Exchange: the upside for the dollar to remain limited against the yen Despite the implementation of a rate hike at the March FOMC meeting, the pace of future interest rate hikes was not revised upward, leading to a pause in the upward pressure on the dollar. The President’s budget message (March 16) lacked detail in relation to areas such as tax cut policies and had limited impact on the foreign exchange markets. While the Trump administration’s fiscal and trade policies are factors contributing to a strong dollar, its currency policy is curbing the dollar’s upside. Expansionary fiscal policy and the corporate tax cut with border adjustment contribute to a stronger dollar, but the dollar is likely to fluctuate on the back of speculation until there is confirmation that such policies will actually be implemented. We also anticipate a period of stronger yen due to a temporary risk-off trend ahead of events such as European elections. US currency policy favors a weak domestic currency. The constraints inferred through statements such as the forthcoming semi-annual Report on Foreign Exchange Policies of Trading Partners of The United States (“semi-annual report on foreign exchange”) will add to pressure for a strong yen and weak dollar. [ US-Japan real long-term interest rate differential and JPY/USD ] (JPY/USD) 125 [ Impact of Trump’s policies on the JPY/USD exchange rate ] (%pt) Fiscal policy Currency policy Trade policy Expansive fiscal policy Weak domestic currency (Constrain weakness in other currencies) Protectionist President Trump's policy direction Corporate border adjustment tax Bilateral agreements Impact on foreign exchange rates when policies implemented Strong dollar Weak dollar Strong dollar Strong dollar when there is risk-off 2.8 JPY/USD 120 US-Japan 10Y interest rate differential (rhs) 2.6 2.4 115 2.2 110 2.0 105 1.8 100 95 Apr-16 1.6 Jun-16 Aug-16 Oct-16 Source: Made by MHRI based upon Bloomberg Dec-16 Main events that President's Budget US semi-annual President's Budget will be used to Message (Detailed) report on foreign Message (Detailed) Trade negotiations (at Congress exchange (Scheduled determine Congress any time) deliberations for April 15) deliberations implementation 1.4 Feb-17 (mmm-yy) Source: Made by MHRI 8 5. Japanese Stock Market: chasing highs seems unlikely in the short term, but the market has scope to rise Japanese stocks are up an down, while close attention is being paid to foreign exchange movements. Investors are taking a wait-and-see stance ahead of major overseas events, but there is limited downside risk as the BOJ is purchasing ETF when the market is down. Chasing highs seems unlikely in the near term given the ongoing uncertainty about political circumstances in Europe, and the prospects for US tax reforms, trade and currency policies. However, despite growing expectations for next fiscal year’s earnings, the forecast PER remains in the 14 levels and there is scope for the market to rise. [ Trading trends in Japanese stocks by investor type (Weekly) ] (100 billion yen) 10 8 [ Nikkei Average estimated from forecast EPS and the actual ] (points) Corporations Investment trusts Individuals Trust banks (pension funds etc.) Foreign investors Nikkei average (end of wk, rhs) 20,000 (Points) 24,000 23,000 19,000 6 22,000 21,000 18,000 4 20,000 19,000 2 17,000 0 18,000 17,000 16,000 -2 -4 15,000 -6 16,000 Estimated stock price (PER 14x) 15,000 Estimated stock price (PER 15x) 14,000 Estimated stock price (PER 16x) Actual (intra month average) 13,000 Jan-15 -8 16/May16/Jun 14,000 Jul-15 Jan-16 Jul-16 Jan-17 Jul-17 Jan-18 (mmm-yy) 16/Jul 16/Aug 16/Sep16/Oct16/Nov 16/Dec17/Jan17/Feb17/Mar Note: Aggregate of 1st and 2nd Sections Source: Made by MHRI based upon Bloomberg and the Tokyo Stock Exchange Note: Estimated using the forecast EPS for TOPIX at the end of February and NT ratio of 12.4 Source: Made by MHRI based upon IBES 9 Mizuho Research Institute Ltd. This publication is compiled solely for the purpose of providing readers with information and is in no way meant to solicit transactions. Although this publication is compiled on the basis of sources which we believe to be reliable and correct, Mizuho Research Institute does not warrant its accuracy and certainty. Readers are requested to exercise their own judgment in the use of this publication. Please also note that the contents of this publication may be subject to change without prior notice. 10