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Summary
Bank of America Merrill Lynch presents an optimistic economic outlook for Japan, titled "Ready for ignition." The report argues that the consensus underestimates Japan's medium-term GDP and inflation, forecasting higher growth and inflation for CY2017 and CY2018, driven by aligned fiscal/monetary policies and recovering domestic demand. The primary risk factor identified is policy uncertainty from the United States, particularly regarding protectionism and trade following the Trump presidency.
People (1)
| Name | Role | Context |
|---|---|---|
| Izumi Devalier |
Organizations (6)
Timeline (1 events)
Trump presidency
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Key Quotes (4)
"We are upbeat on Japan's outlook and think consensus is underestimating the strength of medium-term GDP and inflation."Source
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Quote #1
"For the first time in four years both monetary and fiscal policy are supporting growth."Source
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Quote #2
"External developments pose the greatest risk to our forecasts, chief among them US policy uncertainty."Source
HOUSE_OVERSIGHT_014410.jpg
Quote #3
"The downside scenario for Japan is a combination of rising US protectionism, sliding global trade, and a stronger yen, which could reduce 2017 growth to zero."Source
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Quote #4
Full Extracted Text
Complete text extracted from the document (3,378 characters)
Japan Economics Viewpoint
Ready for ignition
Bank of America
Merrill Lynch
18 November 2016
Ready for ignition
Bank of America
Merrill Lynch
18 November 2016
Consensus underestimating GDP and inflation
We are upbeat on Japan's outlook and think consensus is underestimating the strength
of medium-term GDP and inflation. We expect growth of 1.4% in CY2017 and 1.2% in
CY2018, well above consensus of just 0.8% growth next year. For the first time in four
years both monetary and fiscal policy are supporting growth. The combination of
modestly higher commodity prices, a weaker yen, and a tightening output gap should
drive Japan-style core inflation to 1.0% in CY2017, and 1.4% in CY2018. We expect the
BoJ to keep its rate targets unchanged for the foreseeable future as inflation moves in
the right direction.
We are upbeat on Japan's outlook and think consensus is underestimating the strength
of medium-term GDP and inflation. We expect growth of 1.4% in CY2017 and 1.2% in
CY2018, well above consensus of just 0.8% growth next year. For the first time in four
years both monetary and fiscal policy are supporting growth. The combination of
modestly higher commodity prices, a weaker yen, and a tightening output gap should
drive Japan-style core inflation to 1.0% in CY2017, and 1.4% in CY2018. We expect the
BoJ to keep its rate targets unchanged for the foreseeable future as inflation moves in
the right direction.
Fiscal and monetary policy realigning
For years Japan has oscillated between loose and tight fiscal policy. Japanese
policymakers now seem to be on the same page and we see little risk of another policy
error. If anything, we see upside risks from greater fiscal stimulus via a third
supplementary budget or a relatively aggressive FY17 ordinary budget. Meanwhile, the
BoJ's new interest-pegging regime ensures that financial conditions will become
increasingly stimulatory as inflation rises.
For years Japan has oscillated between loose and tight fiscal policy. Japanese
policymakers now seem to be on the same page and we see little risk of another policy
error. If anything, we see upside risks from greater fiscal stimulus via a third
supplementary budget or a relatively aggressive FY17 ordinary budget. Meanwhile, the
BoJ's new interest-pegging regime ensures that financial conditions will become
increasingly stimulatory as inflation rises.
2017 – a year of recovering domestic demand
We think the economy is heading towards a cyclical sweet spot and see a broad-based
recovery in domestic demand. Specifically, 1) consumption is poised to rebound as the
saving rate peaks; 2) capex should accelerate in response to the improving demand
outlook, deepening supply-side constraints, and “low-for-longer” real rates; and 3)
increased efforts by policymakers to accelerate income redistribution could push up the
velocity of money at the margin, helping to reflate the economy.
We think the economy is heading towards a cyclical sweet spot and see a broad-based
recovery in domestic demand. Specifically, 1) consumption is poised to rebound as the
saving rate peaks; 2) capex should accelerate in response to the improving demand
outlook, deepening supply-side constraints, and “low-for-longer” real rates; and 3)
increased efforts by policymakers to accelerate income redistribution could push up the
velocity of money at the margin, helping to reflate the economy.
Biggest risk factor: US policy uncertainty
External developments pose the greatest risk to our forecasts, chief among them US
policy uncertainty. The downside scenario for Japan is a combination of rising US
protectionism, sliding global trade, and a stronger yen, which could reduce 2017 growth
to zero. The Trump presidency may increase pressure on Japan to achieve greater
military self-reliance, boosting defense spending. There will also be greater incentives to
deepen economic and trade linkages with key regional players, such as China and Russia.
External developments pose the greatest risk to our forecasts, chief among them US
policy uncertainty. The downside scenario for Japan is a combination of rising US
protectionism, sliding global trade, and a stronger yen, which could reduce 2017 growth
to zero. The Trump presidency may increase pressure on Japan to achieve greater
military self-reliance, boosting defense spending. There will also be greater incentives to
deepen economic and trade linkages with key regional players, such as China and Russia.
Chart 1: We think consensus is underestimating the strength of medium-term GDP and inflation
2.0
Real GDP %YoY
1.4
1.5
1.2
1.0
0.7
0.8
0.7
0.6
0.5
Real GDP %YoY
1.4
1.5
1.2
1.0
0.7
0.8
0.7
0.6
0.5
0.0
-0.5
CY16
CY17
CY18
CY17
CY18
BofAML
CPI ex fresh food %YoY
1.4
1.0
0.6
0.4
-0.3 -0.3
1.4
1.0
0.6
0.4
-0.3 -0.3
CY16
CY17
CY18
CY17
CY18
Consensus (Bloomberg, as of 15 Nov 2016)
Source: BofA Merrill Lynch forecasts, Bloomberg
BofA Merrill Lynch does and seeks to do business with issuers covered in its research reports. As a
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 13 to 14.
result, investors should be aware that the firm may have a conflict of interest that could affect the
objectivity of this report. Investors should consider this report as only a single factor in making
their investment decision.
Refer to important disclosures on page 13 to 14.
Timestamp: 17 November 2016 03:00PM EST
11686430
Unauthorized redistribution of this report is prohibited. This report is intended for amanda.ens@baml.com
Economics
Japan
Japan
Izumi Devalier
Japan Economist
Japan Economist
Izumi Devalier
Japan Economist
Merrill Lynch (Japan)
+81 3 6225 6257
izumi.devalier@baml.com
Japan Economist
Merrill Lynch (Japan)
+81 3 6225 6257
izumi.devalier@baml.com
HOUSE_OVERSIGHT_014410
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