【NEWS RELEASE】
November 20, 2018
SMBC Nikko Securities Inc.
Quarterly Economy Outlook for FY 2018-2019
November 20, 2018 (JST), “SMBC NIKKO Japan Economic Outlook for FY 2018-2019” has beenreleased.

Could Economy Accelerate in FY19 Despite Tax Hike?
 Real GDP: +1.0% in FY18 and +1.2% in FY19
 Nominal GDP: +0.8% in FY18 and +1.9% in FY19

SummaryGDP growth outlook
We revise our economic outlook in light of the first preliminary estimate for Jul-Sep 2018 GDP.
We forecast real GDP growth of +1.0% YoY in FY18 and +1.2% in FY19, an upward revision of
0.2ppt versus our previous outlook for FY19 to factor in economic measures accompanying theconsumption tax hike.



Domestic economy is solid
Domestic demand in the Japanese economy is strong. Private consumption is recovering on
the back of roughly 3% growth in employee income, which makes up 85% of disposable income.
Capex is also sustainable since the ratio of capital stock to GDP is at the lowest level in 20
years. For inflation, the core CPI has reached +1% YoY, but we expect it to slow in 2019 due tothe recent sharp decline in crude prices.
While some market participants expect the BOJ to hike interest rates around April 2019, we
consider this unlikely since inflation would likely slow and there is risk that rate hikes prompt
yen appreciation. Some experts argue that rates should be hiked in order to create room for
future rate cuts, but we note that long-term interest rates have already increased by around10bp following the BOJ's move to tolerate wider fluctuations in long-term rates at its Julymonetary policy meeting. We think this was precisely the "making room" that experts are callingfor—the BOJ has built in a mechanism for interest rates to fall naturally without it raising or
lowering rates itself. We do not expect any rate hikes until after the consumption tax hike.

This material is an English translation of Japanese announcement made on August 20, 2018. Although the company intended to faithfullytranslate the Japanese document into English, the accuracy and correctness of this translation are not guaranteed and thus you areencouraged to refer to the original Japanese document.



Risks
We see the following risk factors: 1) the consumption tax hike, 2) the global equity market
selloff, and 3) the slowing Chinese economy.
With regard to the consumption tax hike, we put the burden on household budgets from the tax
hike at Y2.2tn. On the other hand, government policies to ease the burden are set to amount toY5.4tn (Y200bn from automobile tax reductions, Y200bn from housing tax reductions, Y1tn
from allowing sales events, Y1tn from reducing telecom charges, Y3tn from public works). It is
actually likely that the economy accelerates in FY19.
With regard to the global equity market sell-off, one driver of the sell-off is concerns over the US
economy as a result of rising US long-term interest rates. Usually, concerns that the economy
will lose speed emerge when long-term interest rates exceed the neutral interest rate, which
represents the return for the real economy. Concerns over a slowdown have emerged suddenly
on financial markets as the long-term interest rate overtook the upper bound for the neutralinterest rate (3.2%) in early October.
The rise in long-term interest rates reflects concerns over deterioration in external balances(current account balance) due to overheating in the US domestic economy. That said, CBO
forecasts call for the current account balance to worsen in 2019 and then trend flat. Interest
rates should not rise if the current account balance does not worsen, so we would expect
long-term interest rates to settle down moving forward.
With regard to the slowing Chinese economy, the slowdown owes to two factors—lower
automobile sales and lower infrastructure investment. The Chinese government is rolling out
stimulus measures, and it has got its targets right (automobiles, infrastructure investment), so
we expect the Chinese economy to bounce back from around the start of 2019.

2

Quarterly forecasts for Japanese economy《Actual》← →《Forecasts》
2017《A》← →《F》 (Unit:%)

2018

2019

2020

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

0.6

0.5

0.7

0.2

-0.3

0.8

-0.3

0.6

0.4

0.3

0.5

-0.3

0.3

(annual rate)
Domestic demand, contribution (QoQ)
Private consumption (QoQ)
Capex (QoQ)
Residential investment (QoQ)
Public investment (QoQ)
Foreign demand, contribution (QoQ)
Exports (QoQ)
Imports (QoQ)
Nominal GDP growth (QoQ)
Industrial production (QoQ)
Trade balance (Y tn, SAAR)

2.3
0.5
0.5
0.6
1.1
-0.4
0.1
1.7
1.4
0.1
3.9
4.6

1.9
0.8
0.8
0.2
1.6
5.0
-0.3
-0.2
1.7
0.7
5.6
3.2

2.9
0.1
-0.6
1.5
-1.8
-2.2
0.6
2.7
-1.0
1.1
4.4
7.7

0.8
0.3
0.3
0.7
-3.2
-0.8
-0.1
2.1
3.1
0.2
4.1
6.9

-1.1
-0.3
-0.2
0.7
-2.1
-0.5
0.1
0.5
0.1
-0.5
2.5
4.0

3.0
0.9
0.7
3.1
-1.9
-0.3
-0.1
0.3
1.0
0.6
2.0
2.7

-1.2
-0.2
-0.1
-0.2
0.6
-1.9
-0.1
-1.8
-1.4
-0.3
-0.2
0.4

2.2
0.5
0.3
1.0
1.0
3.0
0.0
0.6
0.5
1.1
0.7
0.7

1.7
0.5
0.2
0.8
4.0
0.0
0.0
0.8
1.0
-0.3
2.6
5.2

1.3
0.4
0.1
0.8
2.0
1.0
-0.1
0.8
1.2
1.3
2.3
5.5

2.2
0.7
1.0
0.8
-4.0
1.5
-0.2
0.8
2.0
-0.1
5.1
4.5

-1.3
-1.0
-2.0
0.5
-3.0
0.2
0.7
0.8
-3.0
1.0
0.5
8.8

1.0
0.3
0.2
0.5
-1.0
0.2
0.0
0.8
1.0
-0.4
1.0
8.8

Unemployment rate (%)

2.9

2.9

2.8

2.7

2.5

2.4

2.4

2.3

2.3

2.2

2.2

2.1

Core CPI (YoY)

0.2

0.4

0.6

0.9

0.9

0.8

0.9

1.1

1.1

1.1

1.1

2.2

(Ex effects of consumption
tax hike)

0.2

0.4

0.6

0.9

0.9

0.8

0.9

1.1

1.1

1.1

1.1

IOER (Eop)YCC 10y JGB yields target (Eop)

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

US real GDP growth (QoQ annualized)

1.8

3.0

2.8

2.3

2.2

4.2

3.5

2.8

2.4

US unemployment rate (%)

4.6

4.3

4.3

4.1

4.1

3.9

3.8

3.8

2.2

1.8

1.7

1.8

1.9

2.2

2.2

2.1

US core CPI (YoY)
Fed rate (Eop)

FY16

FY17

FY18

FY19

Comparison withprevious forecasts(as at 10 Sept 2018)
FY18

FY19

1.2
0.4
0.3
1.2
6.2
0.9
0.8
3.6
-0.8
1.0
1.5
4.8

1.6
1.2
0.8
3.1
-0.3
1.5
0.4
6.3
4.1
1.7
4.1
5.5

1.0
1.0
0.7
4.9
-3.6
-1.3
0.0
1.6
1.7
0.8
1.3
2.3

1.2
1.2
0.5
2.8
0.8
3.7
0.0
2.8
1.7
1.9
2.2
6.9

0.0
0.0
-0.2
1.4
0.6
-0.9
0.0
-1.7
-1.4
-0.4
-0.8
-2.4

0.2
0.2
0.3
0.8
-2.8
0.5
0.0
-0.6
-0.1
-0.5
-0.3
-1.0

2.1

3.0

2.7

2.3

2.2

0.0

0.0

2.3

-0.2

0.7

1.0

1.7

0.1

0.0

1.2

1.3

-0.2

0.7

1.0

1.2

0.0

0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

0.0

0.0

0.0

0.0

2.3

2.3

2.1

2.1

2.0

2.5

3.2

2.3

0.1

0.1

3.8

3.7

3.7

3.6

3.6

4.9

4.3

3.9

3.7

0.0

0.0

2.3

2.3

2.2

2.2

2.2

2.2

1.9

2.1

2.3

-0.1

0.0

0.875 1.125 1.125 1.375 1.625 1.875 2.125 2.375 2.375 2.625 2.875 3.125 3.125 0.625 1.375 2.375 3.125

0.00

0.00

Assumptions: Forex rate (annual mean): Y112.9/USD in FY18, Y117.4/USD in FY19; Crude oil price (WTI annual mean): $66.4/bbl in FY18
and $65.0/bbl in FY19.
Notes: 1) US GDP on a calendar basis, US unemployment rate is the average for the period, and FF rate at end of year. 2) Actual figures from
Cabinet Office, MIC, METI, BOJ. Forecasts by SMBC NIKKO.
Sources: Cabinet office (CAO); Ministry of Economy, Trade and Industry (METI); Ministry of Internal Affairs and Communications (MIC); Bankof Japan (BOJ); SMBC NIKKO estimates

Outlook for Real GDP growth(YoY % chg, contribution, ppt)

5

Our outlook

4
3

1.6
2

1.0

1.2

1.2

1
0
-1
Consumption
tax hike(8% -> 10%)

-2
-3
2012

2013

2014

2015

2016

Private consumption
Capex
Government expenditure
Exports of goods and services

2017

2018

2019 (FY)

Private residential investm ent
Private inventory
Imports of goods and services
Real GDP

Source: CAO, SMBC NIKKO forecast

3

APPENDIXANALYST'S CERTIFICATION
Each analyst shown on the first page of this research report prepared and issued by SMBC Nikko Securities Inc. (“SMBCNIKKO”) is primarily responsible for the preparation and content of this research report. Each analyst certifies that theopinions contained herein accurately reflect the analyst's individual views for the subject securities and issuers. Eachanalyst also certifies that no part of the analyst's compensation was in the past, at present, or in the future, directly or
indirectly related to the specific recommendations or views expressed in this research report.
IMPORTANT DISCLOSURES
Target prices assigned by research analysts reflect the estimated share price level the analyst forecasts the stock to reach
within the next six to 12 months.
Each coverage stock is assigned an investment rating relative to the analyst or analyst team’s coverage sector universe
which encompasses said stock. Investment ratings are defined as below; the effective rating period is six to 12 months.
1-Outperform:An individual stock's investment return, as forecast by the research analyst, is expected to exceed the
median investment return of all stocks within the coverage universe.
2-Neutral:An individual stock's investment return, as forecast by the research analyst, is expected to be in line withthe median investment return of all stocks within the coverage universe.
3-Underperform:An individual stock's investment return, as forecast by the research analyst, is expected to be below
the median investment return of all stocks within the coverage universe.
NR:Not Rated
RS:Rating Suspended
Also please note the following:
During the period from October 30th 2012 until November 16th 2016, each coverage stock classified as a Small-Mid Caps
& Growth Stocks was assigned an investment rating based on expected performance versus the market average (definedas TOPIX). Investment ratings are defined as below; the effective rating period is six to 12 months.
A-Outperform: An individual stock's investment return, as forecast by the research analyst, is expected to exceed
the market average.
B-Neutral:An individual stock's investment return, as forecast by the research analyst, is expected to be in line withthe market average.
C-Underperform:An individual stock's investment return, as forecast by the research analyst, is expected to be below
the market average.
NR:Not Rated
RS:Rating Suspended
Sector ratings are defined as below; the effective rating period is six to 12 months. The market as it pertains to Japan is
TOPIX.
Overweight: The investment return of the sector coverage universe, as forecast by the research analyst, is expected
to exceed the market average.
Equal weight:The investment return of the sector coverage universe, as forecast by the research analyst, is expected
to be in line with the market average.
Underweight:The investment return of the sector coverage universe, as forecast by the research analyst, is expected
to be below the market average.

4Distribution of Investment Ratings
The following table shows (1) the distribution of investment ratings for all SMBC NIKKO coverage universe stocks and(2) the proportions of stocks of each rating to which SMBC NIKKO or an affiliate or other related party has provided
investment banking (IB) services within the past 12 months (updated as of 19 November, 2018)(1) Companies under coverage(2) Proportion of stocks of each rating in (1) with IB
relationships

1-Outperform

2-Neutral

3-Underperform

Others

36%

55%

7%

1%

42%

35%

22%

38%

Note: For the purposes of mandatory regulatory disclosures, 1-Outperform corresponds to a “buy” rating, 2-Neutral
corresponds to a “hold” rating, and 3-Underperform corresponds to a “sell” rating. However, SMBC NIKKO investment
ratings are assigned relative to an analyst or analyst team’s sector coverage as defined above and are thus different from“buy”, “hold,” and “sell” ratings as defined by FINRA.
Analyst compensation, including the compensation of the analyst(s) directly involved in the preparation of this report, isbased upon (among other factors) the overall profitability of SMBC NIKKO, which includes the overall profitability ofinvestment banking services.
Please refer to the following URL for all relevant and current price charts and the history of changes in investment rating(s) and/or
target price(s):https://researchdirect.smbcnikko.co.jp/disclosure/disclosure.php
Clients may request all relevant and current disclosures by contacting a SMBC NIKKO or branch representative, or by sending arequest to the following postal address:
Equity Research Division, SMBC Nikko Securities Inc., 1-5-1 Marunouchi, Chiyoda-ku, Tokyo, 100-6519
Individual stock/sector recommendations and share price forecasts contained in SMBC NIKKO’s technical analysis
reports are based on a variety of technical analysis techniques that take historical share price performance, position
analysis, and other technical factors into consideration, but are not based on a fundamental analysis of thosestocks/sectors in question. Accordingly, stock/sector recommendations and share price forecasts based on the technicalanalysis of individual stocks/sectors that are also within the SMBC NIKKO fundamental equity research coverage
universe do not necessarily correspond to, nor are intended to match, respectively, the fundamental investment/sector
ratings and target prices determined by SMBC NIKKO’s fundamental equity research analysts responsible for covering
those same stocks/sectors.
General Disclaimer
This research report has been produced by SMBC NIKKO for informational purposes only. It does not constitutesolicitation of the sale or purchase of securities or other investments. The information contained herein is derived fromsources that SMBC NIKKO believes to be reliable, but SMBC NIKKO does not guarantee the accuracy or completeness of
said information. In some cases, such information may be incomplete or summarized. Prices, numbers, and similar datacontained herein include past results, estimates, and forecasts, all of which may differ from actual data. These prices,
numbers, and similar data may also change without prior notification. This research report does not guarantee future
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5

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Company NameSMBC Nikko Securities Inc. is a financial instruments dealer governed by the Financial Instruments and Exchange Act,
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6

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7