Economics
DBS Focus
Japan: 5 challenges in the second half
Economics/Japan/Growth/Monetary
Group Research
30Ma Tieying
Economist
Please direct distribution queries to
Violet Lee +65 68785281 violetleeyh@dbs.com
• The economy grew faster than expected by
2.3% QoQ saar (1.1% YoY) in 1H19.
• But a series of challenges lie ahead in 2H19,
including: 1) consumption tax hike, 2)
Japan-South Korea trade tensions, 3) China-
US trade war, 4) lingering threat of the US’s
automobile tariffs, 5) appreciation
pressures on the yen due to Fed/ECB easing
and global risk aversion.
• Implication for our forecasts: We maintain
the 2019 GDP growth forecast at 0.7%,
despite the better-than-expected 1H.
Inflation forecast is lowered to 0.8% (from
1.1%) for 2019 and to 1.3% (from 1.6%) for
2020.
• Implication for investors: The chances of
BOJ easing in 2H19 are on the rise. Potential
options include strengthening the forward
guidance, widening the 10Y yield band and
directly cutting the policy rate.
August 13, 2019
The Japanese economy has fared better than
expected so far this year. GDP growth
registered 1.8% QoQ saar in 2Q, slower than the
2.8% in 1Q, but still better than the potential
rate of about 1%. Strong domestic demand
(consumption, investment, public spending)
helped to offset the decline in net exports.
In 1H19, growth averaged 2.3% QoQ saar, or
1.1% YoY, exceeding our original estimate by a
significant margin. Taking into account a series
of external and domestic challenges facing the
economy in 2H19, however, we maintain the
full-year GDP growth forecast at 0.7%.
Japan: GDP growth breakdown
% QoQ saar, ppt
4
2
0
-2
Private consumption
Govt consumption
Investment
-4 Net exports
1Q-16 1Q-17 1Q-18 1Q-19
Source: CEIC, DBS
1) Consumption tax hike
The ruling Liberal Democratic Party achieved
victory during the July upper house election,
paving the way for Prime Minister Shinzo Abe to
implement the planned consumption tax hike in
October (from 8% to 10%). Tax hike may trigger
Refer to important disclosures at the end of this report.
Japan: 5 challenges in the second half
a one-off decline in domestic demand in 4Q19,
despite the counteracting measures prepared
by the government (e.g., free education,
financial assistance to low-income households).
At present, rush demand ahead of the
upcoming consumption tax hike is not yet in
sight, suggesting that demand may not plunge
thereafter. Among the big-ticket items that
attract rush demand, motor vehicle saw sales
growth of 4.1% YoY in July (vs. 3.1% in Apr-Jun),
while condominium sales posted a 15.3%
decline in June.
However, consumer confidence index has been
falling persistently through the first seven
months of this year, by about 5 points
cumulatively. This is identical to the pattern
seen prior to the previous round of
consumption tax hike in 2014 – not a good sign
for the post-tax hike outlook in 2H19.
Japan: Consumer confidence index
46
44
42
40
38
36
2013 2014 2015 2016 2017 2018
Source: CEIC, DBS
2) Japan-South Korea trade tensions
On the external front, there are more
headwinds. Japan and South Korea announced
earlier this month to remove each other from
the list of countries that enjoy preferential
August 13, 2019
treatment in trade. Meanwhile, in light of the
deterioration in bilateral ties, South Koreans
have started to boycott Japanese travel and
consumer goods, on a voluntary basis.
Japan’s export controls imposed on South
Korea are likely to slow the production activities
in the latter’s manufacturing sector, particularly
semiconductor and display screen sectors. This
would, in turn, create ripple effects on the
regional supply chains including hurting the
downstream Japanese electronics producers.
South Korea’s retaliatory measures are likely to
hurt Japan more directly. South Korea is
currently Japan’s third largest export
destination (7% of total exports), and second
largest tourism market (24% of total visitor
arrivals). A 10% decline in exports to South
Korea, together with a 20% decline in the
number of South Korean visitors, are estimated
to cut Japan’s GDP growth by 0.15ppt.
3) China-US trade war
The re-escalation of China-US trade war poses
another challenge for the exports outlook in
2H19. US President Donald Trump said earlier
this month that his government will impose
10% tariffs on the remaining USD 300bn
Chinese goods entering the US, effective from
September 1. This new tariff list includes a wide
range of consumer electronics products, which
carries the risk of seriously disrupting the
2019
regional supply chains and trade flows.
Japan actively participates the China-centered
electronics supply chain today, ranking as
China’s third largest import market of electrical
machinery and equipment. Japan’s exports to
China and exports of electronics products have
already been falling continuously so far this
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Japan: 5 challenges in the second half August 13, 2019

year, feeling the pain from the slowdown of the source of automobile imports. Assuming a price
Chinese economy and the cyclical downturn in elasticity of 1.0, a 25% tariff on Japan’s
the global tech sector. Things may get worse automobile exports to the US is estimated to
instead of better, if the China-US trade war cut Japan’s GDP growth by 0.25ppt.
continues to escalate and spread.
5) Yen’s appreciation
Japan: Exports to China & Electronics exports
% YoY Last but not the least, in the financial markets,
30 China Electrical machinery the Japanese yen is facing the pressure to
appreciate. This is against the backdrop of the
20
Fed’s monetary easing, the ECB’s strong signal
10 for monetary easing, and the resultant broad-
0
based decline in DM yields. Periodic
appreciation pressures on the yen also come
-10 from the rise in global demand for safe haven
-20 assets, in the context of the China-US trade war,
and the geopolitical risks related to Brexit, Iran
-30
2016 2017 2018 2019
and recently, Hong Kong.

Source: CEIC, DBS JPY effective exchange rates

2010=100
115 REER NEER
4) The US’s automobile tariffs
110
105
In addition, as far as the Japan-US trade
100
relations are concerned, the threat of the US’s
95
automobile tariffs still lingers. The US is set to 90
decide whether to impose steep tariffs on 85
automobile imports from its trade partners by 80
November. Whether Japan can be exempted 75

will depend on the results of the ongoing Japan- 70

US trade negotiations. It was recently reported
that the two countries target a bilateral trade
deal by September. To achieve that, Japan
would need to agree to open up its politically
sensitive agriculture sector, including lowering
tariffs on US beef imports.
Potentially, higher automobile tariffs imposed
by the US could hurt Japan’s exports badly. The
US is currently Japan’s largest automobile
export market, accounting for a share of about
one third. Japan is also the US’s third largest
65
2008 2010 2012 2014 2016 2018
Source: CEIC, DBS
The yen has gained 4% against the US dollar and
more than 6% against the euro so far this year.
On the trade weighted basis, the yen remains
cheap compared to the level before Abenomics
was introduced in 2013. Still, a sharp, one-way
rise in the yen would be a warranted concern,
as it erodes exporters’ corporate earnings,
hurts capex/wage outlook in the manufacturing

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Japan: 5 challenges in the second half August 13, 2019

sector, and importantly, dampens public maintain the extremely low interest rates
inflation expectations. through 2020 (instead of “spring 2020”).
Another is to widen the range of the 10Y yield
Rising chances of BOJ easing band, probably from ±0.2% to ±0.3%. The BOJ
also has the room to further cut the policy rate,
The chances of Bank of Japan easing in 2H19 are
e.g., from the current -0.1% to -0.2%. This
on the rise. The BOJ has showed a clear bias
would be done together with some
towards easing at the latest meeting in July,
complementary measures to mitigate the side-
adding a line in the policy statement to say that
effects on banks’ profits, such as offering
it will take additional easing measures without
negative lending rates to banks, or slicing and
hesitation if there is a risk that the economy will
dicing banks’ reserves to reduce the portion
lose momentum for hitting the price target.
subject to negative deposit rates.
There will be three scheduled BOJ board
meetings in the remainder of this year, in
September, October and December
respectively. An actual move of policy easing
could come as early as the September meeting, Recent publications
depending on how the key economic data and Japan-Korea tensions pose new risks to electronics supply
financial market conditions pan out in the next chains
several weeks. Japan: Risks beneath 1Q GDP figures
Japan: Three key growth challenges in 2019
In terms of the possible policy options, one is to
strengthen the forward guidance by pledging to

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Japan: 5 challenges in the second half August 13, 2019

Group Research
Economics & Strategy Team

Taimur Baig, Ph.D.

Chief Economist - G3 & Asia
+65 6878-9548 taimurbaig@dbs.com

Chang Wei Liang Ma Tieying, CFA

Strategist Economist - Japan, South Korea & Taiwan
+65 6878-2072 weiliangchang@dbs.com +65 6878-2408 matieying@dbs.com

Nathan Chow Radhika Rao

Strategist - China & Hong Kong Economist - Eurozone & India
+852 3668-5693 nathanchow@dbs.com +65 6878-5282 radhikarao@dbs.com

Masyita Crystallin, Ph.D. Irvin Seah

Economist - Indonesia & Philippines Economist - Singapore, Malaysia, & Vietnam
+ 62 21 2988-4003 masyita@dbs.com +65 6878-6727 irvinseah@dbs.com

Joanne Goh Duncan Tan

Equity strategist Strategist - ASEAN
+65 6878-5233 joannegohsc@dbs.com +65 6878-2140 duncantan@dbs.com

Eugene Leow Samuel Tse

Rates Strategist - G3 & Asia Economist - China & Hong Kong
+65 6878-2842 eugeneleow@dbs.com +852 3668-5695 samueltse@dbs.com

Chris Leung Philip Wee

Economist - China & Hong Kong FX Strategist - G3 & Asia
+852 3668-5694 chrisleung@dbs.com +65 6878-4033 philipwee@dbs.com

Sources: Data for all charts and tables are from CEIC, Bloomberg and DBS Group Research (forecasts and transformations).

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