JAPAN

Economic growth is expected at +0.8% in 2019, a pace similar to 2018. While the first quarter has been weak due to slowing global trade, we see a gradual improvement going forward. In the near term, domestic demand is set to gain some traction, helped by a rise in both private consumption and investment. In particular, we see a frontloading of household spending in Q2 and Q3 ahead of the planned October 2019 sales tax hike (from 8% to 10%), before a contraction in Q4 after its implementation. Investment will pick up speed gradually, helped by favourable monetary conditions, rising expenditure for automation due to labour shortages and construction projects for the 2020 Olympics. Exports are expected to recover somewhat in the second half of this year as global demand recovers and tensions between China and the U.S. start to ease.

Risks to the outlook are elevated. Domestically, while the increased sales tax could be positive for public debt sustainability, it could hamper growth significantly. The last increase of the sales tax (from 5% to 8% in April 2014) was followed by a -1.8% q/q contraction of GDP. Secondly, trade-related risks also pose a substantial threat to the outlook. Japan is exposed to trade both directly via exports and indirectly though the exports of subsidiaries of Japanese companies based in different countries.

External indicators are generally robust. The country has a solid net foreign creditor position (net foreign assets account for c. 60% of GDP). The current account balance is in surplus (+3.5% of GDP) and there is no significant decrease expected. While the export outlook is weak, the reduction in the energy bill will likely support a surplus in the trade balance. On the currency front, we expect relative stability as the U.S. adopts a more dovish stance.