Boston, MA -- (ReleaseWire) -- 02/14/2014 -- Japanese corporates continue to maintain a cautious stance despite the improvement in current business conditions. We do not expect many businesses to heed Prime Minister Shinzo Abe's calls to raise wages given the limited upside potential for profits. As such, together with the negative effects from the consumption tax hike and the rising import bill (due to the weakening currency), we project real GDP growth to slow to a subdued pace of 1.3% in 2014.
Even as Abe reiterates his pledge to maintain reform efforts to various sectors, we believe that actual implementation is still some way off. We believe that both the Bank of Japan (BoJ) and the government are likely to enact more expansionary policies (even though they will not produce any long-lasting or significant impacts) while reforms take a backseat.
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We maintain our concerns with regards to the permanence and sustainability of 'Abenomics' and highlight the growing pressure on the BoJ to expand its monetary stimulus, both from an inflationary perspective as well as given the need to stabilise yields in the government bond market.
The massive changes in Japan's current account dynamics continue to push the country's current account balance towards zero and into the red beyond 2018. A downside risk to our current account forecast would be possible delays in Australian liquefied natural gas supply, which has so far suffered from cost overruns and shortages in skilled labour.
Long-term household savings rates will continue to decline as a progressively ageing society and a shift towards lower-paying contract (non-regular) employment forces more Japanese households to consume a greater proportion of their income. Consequently, this will place significant downward pressure on Japan's net international investment position, although a shift from positive to negative territory will very likely take more than 30 years.
We remain concerned about the increasing pressure on longer-dated interest rates. Higher inflation, together with a greying population, suggest that deposits will decline over time. Moreover, we maintain that the country's large stock of debt could be a destabilising force for both the economy and the banking system, especially since Japanese banks hold a significant portion of government bonds. Indeed, given that significant cuts to fiscal expenditure remain unlikely, a fiscal crisis, with more apparent monetisation of debt, looks increasingly unavoidable.
Major Forecast Changes
We have raised our estimate for 2013 real GDP growth, and now expect it to come in at 2.4% owing to stronger-than-expected private consumption growth over the first three quarters of the year.
We believe that the central bank is likely to ramp up its monetary stimulus sometime after the Q413 GDP print is released and around the time that fiscal year 2014 begins (April-March).
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