Macro Monday:Japan Tracking consumer confidence

Please refer to page 21 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 Japan in a snapshot 18 The OECD LI, latest data 19 Date Indicator Month August 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 15 2Q GDP (1st prelim) Apr-Jun 18 Trade Balance July 19 All Industry Activity 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 8 August 2016 Macquarie Capital Securities (Japan) Limited Macro Monday: Japan Tracking consumer confidence Key data release: Economy Watchers Survey (Monday): The consumer confidence surveys (the consumer confidence index, CCI, the Economy Watchers Survey, EWS) are among the first data released each month. The July CCI released last week unexpectedly weakened to 41.3 (June 41.8). Sub-categories “income growth”, “employment” and “willingness to buy durable goods” all fell. The EWS (black line below) tends to be more volatile. If the EWS confirms the CCI weakness, it would indicate that lacklustre consumption is likely to continue (page 3). Consumption is around 57% of GDP (Fig 88). Consumer confidence index and Economy watchers survey Note: The consumer confidence series average since 1982 is 42.1. The Economy Watchers Survey series average since 2000 is44.5 Source: CAO, CEIC, Macquarie Research, August 2016 The BOJ needs a stronger revival in private sector activity to drive a wage/price cycle leading to the CPI target of 2% pa on a sustained basis. However, non-financial private sector credit growth is on a plateau (18 July 2016 Macro Monday: Japan), and wage growth is struggling to revive (1 August 2016 Macro Monday: Japan). Meanwhile, the supplementary fiscal budget has failed to impress (25 July 2016 Macro Monday: Japan). We believe that the policy of financial repression has led Japan into a low growth trap, report link left. 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 0.3 0.5 0.9 (**) 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 86.3 105.4 119.8 120.4 105 101 97 95 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 152025303540455055602004200520062007200820092010201120122013201420152016Consumer confidence index -excluding one person household, SADJEconomy watchers survey -household related activity, actual Macquarie Research Macro Monday: Japan 8 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 18 May 2016 Consumption & Services and the 26 July 2016 Macq-ro insights: Financial repression for decades. 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 improved from 0.5% in 2014 to an estimated 3.3% in 2015 due mainly 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 political considerations. Our base case has the BOJ going from -0.1% to -0.2% on 21 September 2016 and to -0.3% on 20 December 2016.