Tracking Japan’s real GDP growth

Please refer to page 26 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. JAPAN Our Japan macro outlook 2 The Yen 5 The OECD LI, PMIs 6 GDP 7 Consumption 8 Residential investment 9 Employment & wages 10 Exports & Imports 11 Industrial production 12 Private investment 13 Public investment 15 Tax revenue 16 Credit growth 17 Commercial property 18 Inflation 19 BOJ Tankan Survey 22 MOF corporate survey 23 Japan in a snapshot 24 Date Indicator Month October 17 Industrial Production Aug 21 All Industry Activity Index Aug 24 Trade Balance Sep Senior Loan Officer Survey Oct Indexes of Business Conditions Aug 25 26 Services Producer Price Index Sep 28 Consumer Price Index (Tokyo, Oct) Sep Household Survey Sep Unemployment Rate Sep Effective-Job-Offers-to-Job-Seekers-Ratio Sep Input-Output Price Index of MFG Sep Source: Bloomberg, BoJ, Cabinet Office, METI, MLIT, October 2016 Our latest global forecasts are in the 20 September 2016 The Global Macro Outlook 2017: Better, but still a grind. Analyst(s) Nara Song +81 3 3512 7878 nara.song@macquarie.com Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@macquarie.com 17 October 2016 Macquarie Capital Securities (Japan) Limited Macro Monday Japan Tracking Japan’s real GDP growth Key data release: August All Industry Activity Index (Friday) A rough proxy for real GDP growth: with weights based on the amount of value added, this aggregates tertiary industry activity (including the government sector), 73%, with industrial production 21%, and construction activity, 6%. The all industry index has moved fractionally higher over the last two years. All industry activity index Source: METI, Macquarie Research, October 2016 Indices of all industry activity, seasonally adjusted indices Indices of All Industry Activity By Industry Indices of Construction Industry Activity Indices of Industrial Production Indices of Tertiary Industry Activity Weight 100 5.77 20.78 73.45 Q2 2015 102.5 -0.1 109.6 1.1 98.0 -1.3 103.3 0.2 Q3 102.5 0.0 110.1 0.5 97.0 -1.0 103.4 0.1 Q4 102.3 -0.2 108.4 -1.5 97.1 0.1 103.3 -0.1 Q1 2016 102.3 0.0 109.1 0.6 96.1 -1.0 103.6 0.3 Q2 102.7 0.4 111.3 2.0 96.3 0.2 103.8 0.2 Cont. to % change 0.12 0.04 0.14 July 103.2 0.3 114.2 2.0 96.5 -0.4 104.2 0.3 Cont. to % change 0.12 -0.08 0.21 Source: METI, Macquarie Research, October 2016 All three sub-components are volatile (grey highlights), though the all industry activity aggregate has been more stable (pale red highlights). The first preliminary real GDP estimate for July-September 2016 is scheduled to be released 14 November, with the second estimate to be released 8 December. Our real GDP growth forecasts remain anaemic, with modest contributions expected from consumption and net exports, page 2 & 3. 979899100101102103104105106(YoY, %)Indices of all industry index Macquarie Research Macro Monday Japan 17 October 2016 2 Our Japan macro outlook Our real GDP growth forecasts remain anaemic, with modest contributions expected from consumption and net exports. 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 0.2 0.3 ¥/$ (*) 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, September 2016 The impact of financial repression on savings is leading households to be subdued consumers. For more, please see the 5 October 2016 PEC’s Japan strategy: Accentuated sector rotation. One developing positive is the return to export growth to the US and the EU, Fig 2. Fig 2 Japan export to US and EU Source: BOJ, Macquarie Research, September 2016 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 not only reluctant to increase its already considerable JGB purchase program (¥80tr JGB buying compares to a fiscal deficit of ¥35tr, so over 2x effective monetization) but the new arrangements to target the 10-year JGB yield “around zero” will allow the BOJ to slowly begin a taper. However, we believe the BOJ’s buying will not fall below ¥30tr pa for a decade. Please see the 26 July 2016 Macq-ro insights: Financial repression