JPY: Turmoil for Japanese economy due to two surprises – Nomura

Analysts at Nomura notes that the two unexpected events—the result of the UK’s Brexit referendum in June and Donald Trump’s victory in the US presidential election in November—caused turmoil for the Japanese economy, but the resulting risk-off movements in the financial markets ended relatively quickly.

Key Quotes

“We now think the markets will start to focus on economic fundamentals, including the likely impact of economic stimulus measures under a Trump administration.”

“We expect growth will gradually accelerate

We have revised our outlook for the Japanese economy in response to the preliminary GDP data for Jul–Sep 2016. We now project real GDP growth rates of 1.1% y-y in FY16, 1.0% in FY17, and 0.4% in FY18. 

We think Mr Trump’s election victory has greatly increased the uncertainty over the direction of US economic policy. Nevertheless, we expect that Japanese economic growth will see gradual cyclical acceleration through FY17 H1. In our view, one of the drivers of this growth will be export recovery with beneficial knock-on effects on Japanese production activity and subsequently on capital investment. We think reduced uncertainty over US economic policy under Mr Trump will then make this pattern more pronounced. We also expect public sector investment to boost Japan’s growth rate as effects emerge from the economic stimulus decided by the government in August 2016.” 

“Does economic recovery have staying power?

Does the economic recovery we project have staying power? We think effects from stimulus measures will end unless the government decides on considerable additional stimulus during 2017. We also expect that Japanese economic momentum will weaken somewhat from FY17 H2, due to the possibility of softening in exports as overseas economies slow down and of a slowdown in consumer spending due to stagnation in real personal incomes.”

“Will policy controversy subside?

In our view, weakening of the financial markets’ somewhat excessive expectations toward the Japanese government’s policies (which thus far have led to major market developments) is another factor behind the markets becoming more liable to focus on fundamentals. We still see potential for policy expectations to resurface and become a market theme again, however, due to lower inflation persisting, market dissatisfaction with progress in structural reform, or downside risk for the real economy from economic policy under a Trump administration.”