The Japanese economy remains firm. Its GDP growth has been over 1% y/y since Q3 2016, and Bank of Japan (BOJ) Tankan suggests the economy will continue to be steady. Labor conditions have tightened as the unemployment rate dropped to 2.8%, the lowest since June 1994. Nominal wages remain weak but low inflation pressures sustain private consumption in real terms. A steady global economy should support the Japanese economy by supporting its net exports. Tightened labor conditions may stimulate demand for business investments, which also supports the economy.
In the Japan general election for the lower house in October, LDP maintained a super majority with its junior partner Komei, implying that Japanese citizens do not need to change the LDP government under good economic conditions. Japan PM Abe could keep enough power to amend the Japanese constitution, and is likely to continue his economic policy package, Abenomics. Abe will continue to suffer from his political scandals and might resign to take responsibility, but even in that case, Abenomics would be maintained, as most Japanese recognize it could work well based on past experiences.
The Bank of Japan’s Governor Kuroda is likely to be reappointed after his current term expires in April 2018. If so, Kuroda will be the first governor to hold a second term for the past 60 years. Japan PM Abe reportedly said there is no reason to replace BOJ’s governor so far. Some remark that Kuroda could step down and the next governor might change the inflation target to 1%. But even under a new governor, BOJ would keep expanding its balance sheet in 2018. Japanese inflation pressures have been tamed as US core CPI (total goods excluding food and energy) has been almost flat with an annualized 1.5-2.0% growth rate since 2016. BOJ also needs to be cautious with respect to downside risks to growth ahead of hiking the sales tax in October 2019.
The Japanese government will not switch its fiscal policy to tightening. PM Abe expressed sales tax would be hiked in October 2019 and the government never gave up fiscal consolidation. But Abe also said half of revenues from a planned sales tax increase would be used for child care and education instead of the original plan to repay government debt. The government will keep fiscal expenditure steady to support the economy ahead of sales tax.
Japanese stocks gradually continue to rise as the Nikkei index boasted its 16th straight positive day – the longest run in history – touching 22,000 for the first time since July 1996. Japanese stocks have been considered undervalued while net profits for Japanese firms recorded historical highs this year. Foreign investors have started to buy Japanese equities since the last week of September. BOJ continues to purchase equity ETFs at an annual pace of 6 trillion yen, which should support Japanese equities. The economy is likely to remain firm under a steady global economy, Abenomics and solid Japanese equities.
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