Macro Monday Japan：Wage growth struggling to revive

Please refer to page 20 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. JAPAN Our Japan macro outlook 2 Consumption 3 Residential investment 4 Employment & wages 5 Private investment 6 Public investment 8 Tax revenue 9 The Yen 10 Exports & Imports 11 Industrial production 12 BOJ Tankan Survey 13 MOF corporate survey 14 Credit growth 15 Commercial property 16 Inflation 17 The OECD LI, latest data 18 Date Indicator Month August 2 Monetary Base July Consumer Confidence Survey July 3 Monetary Policy Meeting minutes June 5 Monthly Labor Survey June Indexes of Business Conditions June 8 Balance of Payments June Bank Lending July Economy Watchers Survey July 9 Money Stock July 10 Corporate Goods Price Index July Machinery Orders June Tertiary Industry Index June Source: Bloomberg, BoJ, Cabinet Office, METI, MLIT Our global forecasts: 19 July 2016 The Global Macro outlook: Keep calm and carry on 26 July 2016 Macq-ro insights: Financial repression for decades Analyst(s) Nara Song +81 3 3512 7878 nara.song@macquarie.com Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@macquarie.com 1 August 2016 Macquarie Capital Securities (Japan) Limited Macro Monday Japan Wage growth struggling to revive The most important announcement this week: After mild but positive momentum in base wages YoY on an annual and quarterly basis, the April and May 2016 YoY base wages data of 0.0% and -0.2% were very disappointing. With the labor market tight, page 5, and profits holding at high levels, page 13, we believe it is too early to turn pessimistic on wage trends. Please note that part-time wages are rising 1.47% YoY and will be boosted further by a proposed 3% increase in Japan’s minimum wage. Labour compensation trends, “Headline” survey, all industries, firms with ≥5 employees (per person, % YoY) Wages Year/ Total Contractual Quarter/ Cash Cash Base wages Over-time Bonuses Month Earnings Earnings (A)=(B)+(C) (B) = (1)+(2) (1) (2) (C) CY 2013 -0.4 -0.9 -1.0 1.4 1.7 2014 0.4 -0.1 -0.4 2.7 2.9 2015 0.1 0.2 0.3 0.4 -0.8 2015 1Q 0.2 0.1 0.1 0.2 3.8 2014 1Q -0.2 -0.3 -0.7 4.6 0.4 2015 2Q -0.7 0.3 0.3 -1.1 -4.5 2014 2Q 0.4 -0.1 -0.4 4.0 2.5 2015 3Q 0.5 0.3 0.2 1.2 2.2 2014 3Q 1.1 0.1 0.0 1.9 7.6 2015 4Q 0.2 0.4 0.3 1.4 -0.2 2014 4Q 0.4 -0.2 -0.2 0.5 1.7 2016 1Q 0.7 0.4 0.4 0.1 11.0 2015 1Q 0.2 0.1 0.1 0.2 3.8 April 2016 0.0 0.0 0.0 1.1 -1.7 May -0.1 -0.1 -0.2 0.5 1.5 Note: Please note wages and hours worked above include both regular and non-regular (i.e. part-time and temporary) workers. The ratios of regular income, overtime income and bonuses to total income in Japan are very approximately: 84%, 1% and 15%. The latter are paid principally in June, July and December, crudely in the proportions of 35%, 25% and 40%. Source: Monthly Labour Survey, Ministry of Labour, Health & Welfare, Macquarie Research, August 2016 Japan: Macquarie’s key macroeconomic forecasts CY11 CY12 CY13 CY14 CY15 CY16E CY17E CY18E CY19E GDP (YoY, %) -0.5 1.7 1.6 -0.1 0.6 0.4 0.6 0.7 0.8 CPI (YoY, %) -0.3 0.0 0.4 2.7 0.8 0.1 0.4 0.6 1.0 (**) Overnight call rate (*) 0.1 0.1 0.0 0.1 0.0 0.0 0.0 0.0 0.0 10-year JGB (*) 0.99 0.79 0.74 0.3 0.3 -0.1 -0.1 0.3 0.5 ¥/$ (*) 77.6 86.3 105.4 119.8 120.4 110 106 102 100 Note: CPI is the headline CPI ex fresh foods. (*): per period end, Macquarie forecasts. (**) The consumption tax rate increase to 10% from 8% is now scheduled for October 2019 Source: Bloomberg, Macquarie Research, August 2016 Macquarie Research Macro Monday Japan 1 August 2016 2 Our Japan macro outlook Please see the table on the front cover. Our real GDP growth forecasts remain anaemic despite the postponement of the next consumption tax rate increase (to 10% from 8%) from April 2017 to October 2019. The impact of financial repression on savings is leading households to be subdued consumers. Please see the 11 May 2016 Timing the next BOJ move and the 18 May 2016 Consumption & Services. While we have been forecasting a trend appreciation in the Yen, the move has been much stronger than expected. The Yen has been very low/cheap on a REER basis, and the current account surplus has improved from 0.5% in 2014 to an estimated 3.3% in 2015 mainly due to lower energy prices, and 3.5–4.0% is possible in 2016. Currencies are never just about one country. Fig 42 shows the Yen as still the most competitive of the four major currencies. As such, the BOJ’s campaign against deflation and entrenched deflationary expectations has entered a new phase, with the currency now a headwind to the policy goal. We believe the BOJ is reluctant to increase its already considerable JGB purchase program (¥80tn JGB buying compares to a fiscal deficit of ¥35tn, so over 2x effective monetization), and so we expect the BOJ to go deeper into negative territory on the interest rate ’paid’ on tier-three current balances. So far the BOJ has hesitated to cut deeper, perhaps out of p