Macro Monday Japan: IP: A moderate recovery underway

Please refer to page 25 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 November 29 Household Survey Oct Unemployment Rate Oct Effective-Job-Offers-to-Job-Seekers Ratio Oct Retail Sales Oct Input-Output Price Index of MFG Oct 30 Industrial Production Oct New Housing Starts Oct 12/1 MOF Corporate Survey Q3 12/2 Monetary Base Nov 12/5 Consumer Confidence Survey Nov 12/6 Monthly Labor Survey Oct 12/7 Indexes of Business Conditions Oct 12/8 GDP 3Q Balance of Payments Oct Bank Lending Nov Economy Watchers Survey Nov Money Stock Nov Business Outlook Survey Q4 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 28 November 2016 Macquarie Capital Securities (Japan) Limited Macro Monday Japan IP: A moderate recovery underway Key data release: Industrial Production (October) Industrial production drives domestic capacity utilisation, which drives profitability. Unfortunately, there has been no growth in Japan’s industrial production since 2010. There has been a trend decline over the last 12 months, top chart below. Recent strength in export volumes, especially to Europe, suggests that IP is beginning a moderate recovery. Industrial Production and Operating Ratio Industrial Production Activity Index, month on month Note: Grey bar is the METI forecast for October made a month ago Source: METI, Macquarie Research, November 2016 The moderate recovery in IP is expected to be driven by export growth, rather than strong domestic demand. The first preliminary estimate for July-September 2016 Japanese real GDP growth has been released: QoQ saar 2.2 %, YoY 0.9%; above expectations. Net exports made a strong contribution. However, the consumption component was QoQ saar 0.2%, YoY 0.1%; in line with expectations. Domestic demand growth was also anaemic (QoQ saar 0.1%, YoY 0.3%). 607080901001101201301980198319861989199219951998200120042007201020132016(2010=100)Industrial productionOperating ratio-5-4-3-2-101234501/201404/201407/201410/201401/201504/201507/201510/201501/201604/201607/201610/2016(%) Macquarie Research Macro Monday Japan 28 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 86.3 105.4 119.8 120.4 105 104 103 102 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 an 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 with a fiscal deficit of ¥35tr, so over 2x effective monetization). The new arrangement to target the 10-year JGB yield “around zero” could become an issue for the Trump Presidency, being a policy that the US Fed does not use. Please see the 16 November 2016 PEC’s Japan strategy: The BOJ and Kevin Brady. However, we believe the BOJ’s buying will not fall below ¥30tr pa for a decade, and the BOJ will be able to continue to flatten the Japanese yield curve. Please see the 26 July 2016 Macq-ro insights: Financial repression for decades and the 12 October 2016 PEC’s Japan strategy: The cycle through 2017. Fig 3 has the dates