Macro Monday: Japan-2Q GDP

Please refer to page 23 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. JAPAN Our Japan macro outlook 2 GDP 3 Consumption 4 Residential investment 5 Employment & wages 6 Private investment 7 Public investment 9 Tax revenue 10 The Yen 11 Exports & Imports 12 Industrial production 13 BOJ Tankan Survey 14 MOF corporate survey 15 Credit growth 16 Commercial property 17 Inflation 18 Japan in a snapshot 19 The OECD LI, latest data 20 Date Indicator Month August 15 2Q GDP (1st prelim) Apr-Jun 18 Trade Balance July 19 All Industry Activity index June 24 Index of Business Conditions June 25 Services Producer Price Index July 26 Consumer Price Index July 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 15 August 2016 Macquarie Capital Securities (Japan) Limited Macro Monday: Japan 2Q GDP Key data release: 2Q GDP (Monday) The first preliminary estimate for April-June 2016 Japanese real GDP growth will provide an indication as to whether there has been an uptick in growth momentum. We are not optimistic. Consumption remains the key: As shown below, consumption was a solid contributor to growth in 2012-13. In advance of the April 2014 increase in the consumption tax rate from 5% to 8% consumption was particularly strong. The expected two-quarter ‘give-back’ lasted a year, and even subsequently consumption has barely contributed to growth. We attribute this to a policy of financial repression. Please see the 18 May 2016 PEC’s Japan strategy: Consumption & services and the 29 July 2016 The BOJ disappoints again. Contribution to GDP, QoQ SAAR % start 1Q 2012 to latest Note: Investment is the sum of private residential, private non-residential investment and public investment. Consumption is the sum of private consumption and government consumption. Source: CAO, Macquarie Research, August 2016 Without confidence in domestic demand growth, there is little incentive for companies to grow domestic capacity. The table below provides some benchmarks: 2015 2Q, 2016 1Q, and the Macquarie 2016 annual forecast. Japan Real GDP by principal components, and YoY % growth ¥ trillion/Quarterly data SAAR 2014 2015 1Q 2015 2Q 2015 3Q 2015 4Q 2015 YoY 2016 1Q 2016 Macq YoY Private cons. 310.5 308.4 306.0 307.5 305.0 306.7 -1.2 306.4 305.6 -0.4 Residential Inv. 13.7 13.1 13.4 13.6 13.5 13.4 -2.6 13.4 13.9 3.7 Private inv. 71.0 72.2 71.4 71.9 72.8 72.1 1.5 71.7 73.5 1.9 Public cons. 102.2 102.7 103.2 103.3 104.1 103.3 1.1 104.9 103.3 0.0 Public inv. 22.1 21.5 22.2 21.6 20.8 21.5 -2.6 21.0 22.0 2.3 Exports (*) 90.1 95.1 90.5 92.9 92.1 92.6 2.7 92.7 93.5 1.0 Imports (*)) 80.5 81.9 79.8 81.1 80.3 80.8 0.3 79.9 80.5 -0.4 Real GDP 526.1 530.1 527.9 530.1 527.8 529.0 0.6 530.0 531.5 0.4 Note: (*) Goods & Services. Source: CAO, Macquarie Research, August 2016 -4-3-2-101234503/201209/201203/201309/201303/201409/201403/201509/201503/2016(YoY%)ConsumptionInvestmentNet exportGDP Macquarie Research Macro Monday: Japan 15 August 2016 2 Our Japan macro outlook 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. Fig 1 Japan: 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 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. Whilst 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, 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. 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 (¥80tr JGB buying compares to a fiscal deficit of ¥35tr, so over 2x effective monetization), and so we expect the BOJ to go deeper into negative