Financial outlook for 2019: Extra uncertainty for Japan’s financial system amid deliberate tax rise and international slowdown


With the average worker’s pay barely rising and inflation hovering just above zero, it is easy to overlook the resilience of Japan’s economic growth streak, which is currently on track to become the longest in the postwar era.

Yet both internal headwinds, such as the upcoming consumption tax hike slated for this coming October, alongside slowing global growth and stock market downturns around the world, indicate that the party may finally be coming to a close.

While it is highly uncertain as to which looming events will hold back global commerce, professional economic soothsayers appear in agreement on one theme for 2019: Growing risks and subsequent uncertainty will significantly slow Japan’s economic growth over the next few years.

According to analysis from a dozen top Japan-based think tanks, which publish economic outlook reports at the end of the year, there is broad consensus that the domestic economy will grow by less than 1 percent in 2019, a decline from 1.9 percent growth achieved in 2017.

“The Chinese economy is slowing, the Eurozone is slowing, America is also approaching a slowdown — these are not good signs for the Japanese economy,” said Hide Yoneyama, an economist at Fujitsu Research Institute.

Many analysts believe the broad economic slowdown can be partially attributed to the actions of central bankers around the world as they move away from easy-money policies after years of conducting monetary stimulus.

Yoneyama also explained that the potential global slowdown combined with other risk factors — a consumption tax increase, the U.S.-China trade war and the United Kingdom’s potential no-deal exit from the European Union — create a perfect storm that is likely to slow Japan’s own economy.

But not all of Japan’s business sectors are exposed to equal levels of risk from these global trends.

Technology industries such as e-commerce, mobile payments and artificial intelligence are expected to see robust growth over the next few years. Yet these nimble technology companies still represent a fraction of the overall economy and stand in stark contrast to many sectors, such regional banking and many small businesses, which will have less wiggle room to escape the intense pressures wrought by a shrinking population.

If economic forecasters are on the mark, these new upstart companies will be unable to offset the crushing force of demographic pressures, making it likely 2019’s slowdown in growth may be a new norm rather than a temporary setback.

The tax hike bite

The most visible threat to Japan’s economy is the planned tax hike set for October 2019. Although many predict a surge in sales prior to the increase of the consumption tax to 10 percent from the current 8 percent, consumers are also likely to cut back in the immediate aftermath.

And many analysts believe that this will be a major headwind for the Japanese economy from 2019 and beyond.

Estimates for economic growth in 2019 range from 0.4 percent, according to Fukoku Mutual Life Insurance Co., to 0.8 percent, according to separate analysis from Nomura Securities Co., Meiji Yasuda Life Insurance Co. and the Daiwa Institute of Research.

According to a mid-November analysis from Nomura, the impact of the tax hike will push down private consumption by 0.2 percent over the long term, the byproduct of taxes taking a permanent bite out of household spending power.

Another deleterious effect of the tax increase is that business may be reluctant to invest in such an uncertain environment. A recent survey conducted by Teikoku Databank Ltd. showed that the tax increase is the leading concern for businesses in 2019, with over 55 percent citing it as having the potential to slow down sales.

While the government is preparing countermeasures, many forecasters believe its efforts will be unable to completely alleviate the negative effects of the increase. The Daiwa Institute of Research, for example, predicts that even as the government readies a slew of policies aimed at supporting the economy, the total income loss associated with the tax increase will be around ¥3.2 trillion.

Beware of the trade war

The other elephant in the room is the ongoing trade war between the U.S. and China.

The two sides applied tit-for-tat tariffs on over $300 billion in goods in 2018 alone, with U.S. President Donald Trump threatening to ratchet up tariff rates more over the coming year.

Although the overall impact of the trade dispute has thus far remained muted, experts remain concerned the negative impacts may still be building, with the potential to damage investment and consumer sentiment in Japan.

The Fujitsu Research Institute and the Hamagin Research Institute both listed the ongoing U.S.-China trade war as the largest risk facing the Japanese economy in 2019.

Trump and Xi indicated that a compromise may still be on the table, announcing a temporary truce on the sidelines at the recent Group of 20 meeting in Buenos Aires.

But with details of the cease-fire unclear, and a famously mercurial U.S. president dictating how the negotiations proceed, exactly which direction the trade winds blow in 2019 remains up in the air.

Global risks grow

A potential slowdown in Europe and the U.S. financial markets; risks stemming from increasing U.S. debt; and financial instability in developing markets round out the top three risks facing the global economy, according the a mid-November year-end report conducted by Mitsubishi Research Institute.

In part due to these risks, alongside a wide variety of other factors, the International Monetary Fund moved to downgrade the 2018 and 2019 global economic growth projections by 0.2 percent in October, compared to earlier forecasts made in January last year.

And there is a growing list of worries in other parts of the globe as well.

The Daiwa Institute of Research, in a Nov. 21 outlook on the Japanese economy, detailed external “tail risk” scenarios, which they believe could slow down Japan’s real economic growth by a combined 2.6 percent. These scenarios include the United Kingdom exiting from the European Union without a deal, instability in the Middle East and an abrupt slowdown in Chinese growth.

A sliver of hope

Not all analysts are down on the prospects for growth in the Japanese economy.

Hajime Takata, chief economist and managing executive officer at Mizuho Research Institute, believes that the world economy is on the verge of returning to what he calls “a normal era.”

“Based on the United States fiscal policy being able to single-handedly push up the world economy, there is a possibility that the run up to 2020 could be a (positive) economic turning point,” wrote Takata in a year-end report published on Dec. 21 on the outlook of the Japanese economy.

New technologies, which have the potential to unleash productivity increases and growth, are another reason for optimism.

One of Japan’s largest daily newspapers, the Nikkei financial daily, reported in mid-December that the number of startup companies with a valuation in excess of ¥10 billion doubled from the year before. The largest of these firms were in artificial intelligence or financial technology, also known as fintech.

Japanese businesses and consumers also appear to be on the path to adopting mobile payments, a process that could be sped up as the government offers incentives to use these technologies as a part of its policy package intended to cushion the blow from the consumption tax increase.

The Cabinet Office and other ministries are aiming to utilize financial technologies and other new industries, in a plan the government has labeled “Society 5.0,” which they hope can push up economic growth.

On the other hand, regardless of whether these new industries take off, it is unlikely they can offset a broader decline in Japan’s economy as the labor force shrinks. Regional banks and small-to-midsize enterprises, who have struggled to remain profitable despite healthy economic conditions, are emblematic of the uphill climb that many traditional industries face.

Net income at regional banks dropped by 2.4 percent in fiscal 2017, according to data from the Bank of Japan.

With a shrinking workforce, alongside the hangover from the tax hike, Nomura Securities Co. forecasts even slower growth in 2020, at 0.5 percent.

Thus, even if the world can power through 2019 and beyond — an increasingly precarious assumption — the Japanese economic expansion appears ready to once again slow to a glacial pace.



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