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Japan: Upside risks remain? - Nomura

Analysts at Nomura expect Japan’s real economic activity to remain robust, though they view any upside risk as only limited and believe this also applies from a policy perspective. 

Key Quotes

Activity:

  • Economic activity in Q3 2017 moderated, though some upside risks remain from external demand and domestic manufacturing production. Jul-Sep industrial production rose 0.4% q-o-q, decelerating from a 2.1% q-o-q increase in Apr-Jun. As real exports remained solid in Q3, rising by 2.7% q-o-q – a wider margin of growth than the +0.4% in Q2, industrial production is likely to accelerate again in Q4. The survey of manufacturers' production forecasts, released at the same time, imply average industrial production growth in Oct-Nov may be 4.1% higher than in Q3. However, we do not expect the rebound in industrial production to be long-lived, with underlying domestic demand, particularly that of households becoming weaker and manufacturers’ inventory balances look to be deteriorating gradually.
  • Average real consumer spending in Jul-Sep from the Family Income and Expenditure Survey fell 0.4% q-o-q, while real retail sales were 0.3% lower. The shipment-inventory balance (y-o-y change in shipments versus change in inventories) fell sharply in September, indicating a possible production peak.”

Inflation: October Tokyo core CPI inflation rose 0.6% y-o-y, a 0.1ppt rise from September (0.5%) and 0.1ppt above the market consensus. October Tokyo core-core CPI (ex-food and energy but including alcohol) was flat (0.0%), 0.1ppt above August’s figure. In addition to energy and core foods, consumer goods also made a positive contribution to Tokyo core CPI inflation, with a wide range of categories showing gradual increases. We continue to expect a gradual uptrend in core CPI inflation leading into year-end, as a steady improvement in core CPI from a tighter output gap combines with the positive impact from energy prices on core inflation.”

Policy: The snap election on 22 October resulted in a landslide victory for the ruling coalition. The result was positive in terms of continuity of overall policy mix. However, for the following two reasons we think the government's economic policies are unlikely to give the economy and financial markets much of an additional boost. First, as Mr. Abe has already outlined the policies that his government intends to announce by the end of this year, we see little prospect of the actual package being either bigger or economically more effective. Second, as the election victory will renew support for Mr. Abe within the LDP, we think the focus of Japanese politics is likely to be on implementing constitutional reforms that Mr. Abe proposed in May.”

Risks: The key risk to our view is renewed JPY appreciation caused by elevated geopolitical tensions or a deterioration in China’s economy and financial system.”

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