Japan Research Pack

Lowering our outlook slightly on result of Brexit referendum

    On 23 June, more UK citizens voted to leave the EU than voted to stay. Based on theresults of the Brexit referendum, we revise both our global economic outlook and ourforecast for USD/JPY rates. We also adjust our forecast for the Japanese economy toreflect these revisions. We revise our FY16 real GDP growth forecast for the Japaneseeconomy from +0.9% to +0.8%, while we maintain our FY17 growth forecast of +0.9%and our FY18 growth forecast of +0.5%.

    Relatively sharp downward revision to price forecast on forex assumptionchanges

    We revise our end-FY USD/JPY assumption from 123 to 106 for FY16, from 125 to 112for FY17, and from 125 to 112 for FY18. We lower our economic forecasts for Asia toreflect this change in forex assumptions, and we also expect downward pressure onexports and capex. We revise down our FY16 and FY17 forecasts for y-y growth in realgoods and services exports by 0.2ppt each. We also lower our forecasts for y-y growthin real capex by 0.3ppt for FY16, 0.4ppt for FY17, and 0.1ppt for FY18. Our downwardrevisions to our core CPI inflation forecasts are relatively large: down 0.2ppt to -0.2%for FY16 and down 0.3ppt to +0.3% for FY17.

    Downside risks appear higher

    We continue to forecast a gradual economic recovery from 2016 H2 heading into FY17.

    We base this on our view that US economic growth should return to around thepotential growth rate from Apr-Jun 2016 onward, leading to a recovery in exports, andour view that upward pressure on the yen should subside in 2017 as expectations for arate hike by the US Fed pick up again. Now, however, we see a risk that the publicdissatisfaction with perceived economic stagnation that led to majority support forBrexit could spread globally, leading to the collapse of economic integration and aresurgence of protectionism. We must conclude that there is now a heightened risk ofmarket destabilization accompanied by more rapid yen depreciation, as well as anincreased risk that such conditions could persist.

    Expectations for global policy coordination could fail to be realized

    We would like to see the Brexit referendum results lead to more opportunities for globalpolicy coordination to address financial uncertainty and stagnant growth. In the nearterm, however, coordinated expansion in fiscal outlays by G7 countries does not looklikely. Assuming that central banks are likely to move toward more easing in the shortterm, we see the possibility that interest rate gaps between various developed regionsand regional disparities in the aggressiveness of monetary policy could drive furtheryen appreciation. These international policy dynamics could ironically lead to a greaterlikelihood that the Japanese economy could underperform expectations.