Macro Monday Japan：July-Sept 2016 real GDP growth

Please refer to page 25 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. JAPAN Inside 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 November 14 GDP 3Q Industrial Production Sep 21 Trade Balance Oct All Industry Activity Index Sep 24 Indexes of Business Conditions Sep 25 Consumer Price Index (Tokyo, Nov) Oct Services Producer Price Index Oct Source: Bloomberg, BOJ, Cabinet Office, METI, MLIT, November 2016 Analyst(s) Nara Song +81 3 3512 7878 nara.song@macquarie.com Peter Eadon-Clarke +81 3 3512 7850 peter.eadon-clarke@macquarie.com 14 November 2016 Macquarie Capital Securities (Japan) Limited Macro Monday Japan July-Sept 2016 real GDP growth Key data release: 3Q GDP (Monday) The first preliminary estimate for July-Sep 2016 Japanese real GDP growth will provide an indication as to whether there has been an uptick in growth momentum. We are expecting moderate growth to continue. 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 5 October 2016 PEC’s Japan strategy: Accentuated sector rotation and the 2 November 2016 PEC’s Japan strategy: Financial repression & valuation. Contribution to GDP, 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, November 2016 Without confidence in domestic demand growth, there is little incentive for companies to grow domestic capacity. The US elections: Please see the 9 November 2016 Macq-ro insights: Trump and the long durable expansion and the 10 November 2016 TOPIX TP1,700 reiterated: Our top stock recommendations. A Trump presidency reinforces our bullish conviction. The first of two key takeaways for Japan is the Republican party’s emphasis on growth, which through widening 10-year bond spreads (the US versus Japan) enables an easier recycling of Japan’s current account surplus. The risk of a further strengthening of the Yen is greatly reduced. Japan and Russia are progressing slowly towards a Peace and Economic Cooperation treaty. This could lead to very large FDI flows into the Russian Far East and related Japanese industrial exports in return for greater energy security through diversifying energy supplies. It is possible that a Trump presidency could encourage such deal-making, our second key takeaway. Please see the 27 October 2016 Japan and Russia: Investment opportunities. -4-3-2-101234503/201209/201203/201309/201303/201409/201403/201509/201503/2016(YoY%)ConsumptionInvestmentNet exportGDP Macquarie Research Macro Monday Japan 14 November 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, November 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 exports to US and EU Source: BOJ, Macquarie Research, November 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 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. 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