【NEWS RELEASE】
September 8, 2020
SMBC Nikko Securities Inc.

Quarterly Economic Outlook for FY2020-2021 (Update)

September 8, 2020(JST), “SMBC NIKKO Japan Economic Outlook for FY2020-2021” has beenreleased, responding to the second preliminary of GDP (April-June 2020 period)

Economy to Recover as CV19 Threat Eases◆ Real GDP: FY20 -6.2%, FY21 +4.8%◆ Nominal GDP: FY20 -6.2%, FY21 +5.1%

SummaryGDP growth outlook
We revise our outlook to reflect the second preliminary Apr-Jun 2020 GDP data. We forecast
real GDP growth of -6.2% YoY in FY20 and +4.8% in FY21, down 0.2ppt for FY20 from ourprevious estimates (as of 20 Aug). This reflects the downward revision to capex in the second
preliminary GDP estimate. We still expect the domestic economy to recover from Jul-Sep.

This material is an English translation of Japanese announcement made on September 8, 2020. Although the company intended tofaithfully translate the Japanese document into English, the accuracy and correctness of this translation are not guaranteed and thus you
are encouraged to refer to the original Japanese document.



Economic outlook
We expect Japan's economy will trace a V-shaped recovery from a major bottom in Apr-Jun.
The drivers of this will be recoveries from major slumps in private consumption and exports.
Private consumption: Consumer sentiment is improving and mobility has recovered topre-Covid levels. Consumption of goods has also returned to pre-Covid levels and there has
been a clear rebound in consumption of services located close to the home, such as
restaurants and short-haul rail travel. By contrast, the pace of recovery is slow for lodgings andair travel. We think this reflects data from before the removal of requests to refrain fromcross-prefectural travel, and we expect the removal of these requests will result in a gradualshift in behavior. The government's "Go To Travel" campaign should also stimulate
consumption, fueling demand. Meanwhile, increased savings should also bolster consumption.
Household savings have nearly tripled during the pandemic as households curtailed spending.
We think the recovery in sentiment and ample savings should be enough to fuel a
self-sustained recovery in consumption.
Exports: The plunge in exports reflects a sharp fall in auto exports to the US and Europe.
Recently though, auto sales in the US and Europe have rebounded sharply as lockdowns arelifted. Sales still trail potential demand, so could go much higher. We expect auto sales to leadJapanese exports out of their slump.

Threat of 2nd wave of Covid-19
While the number of new cases is rising sharply, mobility and share price levels have regained
pre-Covid levels, suggesting people and markets are not overly concerned with the threat. The
rise in case count is likely a function of increased PCR testing, while the easing of testing
requirements has also likely boosted the capture rate. The true gauge of whether the virus isspreading is the effective reproduction number, which is currently below 1, suggesting theoutbreak is subsiding. We expect the number of positive cases will decline gradually as theinfectivity of the virus weakens, and the virus becomes inactive about 10 days after infecting ahost, including in as yet undetected cases. Meanwhile, the case fatality rate remains low, at
0.65% in Jul-Aug, or around one-quarter of the level in April. The number of fatalities per capita
is two orders of magnitude lower than in the US and Europe.
The effective reproduction number and case fatality rate in Japan suggest the threat of a 2nd
wave of the virus is not all that large. Japan should be able to resume normal social andeconomic activities, provided sufficient care is paid to outbreaks among the elderly.
As economic activity resumes, we think Japan could experience something near to a V-shaped
recovery. We expect real GDP in Jan-Mar 2021 will be around 96.7% of the pre-Covid (Oct-Dec
2019) level.

###2Quarterly forecasts for Japanese economy《Actual》← →《Forecasts》
2019《A》← →《F》 (Unit:%)

2020

2021

2022

FY19

FY20

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

0.7

0.4

0.0

-1.8

-0.6

-7.9

2.6

1.9

1.1

0.9

1.0

1.0

1.0

(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)

2.8
0.2
0.1
1.4
-0.5
2.5
0.5
-1.8
-4.5
1.2
-2.1
-2.4

1.6
0.7
0.5
-0.2
0.8
1.4
-0.3
0.2
1.8
0.5
0.0
-1.0

0.2
0.3
0.4
1.2
0.2
1.1
-0.2
-0.6
0.7
0.4
-1.1
-1.7

-7.0
-2.3
-2.9
-2.2
-4.7
0.6
0.5
0.4
-2.4
-1.5
-3.7
2.8

-2.3 -28.1-0.3 -4.9-0.7 -7.9-4.0 -0.5
1.7 -4.7-0.5
1.1-0.2 -3.0-5.4 -18.5-4.2 -0.5-0.5 -7.6
0.4 -4.0
1.5 -9.3

10.9
0.7
3.1
-2.0
-3.0
0.0
1.9
9.0
-3.0
1.6
-2.0
-2.2

7.6
0.6
1.6
-1.0
-2.0
1.0
1.2
5.7
-2.0
2.2
1.0
3.2

4.4
0.8
1.1
0.0
0.7
0.9
0.3
2.8
1.0
1.0
1.0
3.1

3.7
0.8
1.2
0.8
0.5
0.6
0.1
2.4
2.0
1.1
0.5
1.7

4.0
0.9
1.2
0.8
1.0
0.2
0.1
2.4
2.0
1.1
0.5
0.2

4.0
0.9
1.2
0.8
1.0
0.1
0.1
2.4
2.0
1.1
2.0
-1.3

3.9
0.9
1.2
0.8
1.0
-0.2
0.1
2.4
2.0
1.1
2.0
-1.8

0.0 -6.2
0.2 -5.1-0.5 -6.6
0.6 -6.2-0.3 -8.6
3.3
2.1-0.2 -1.1-2.6 -13.5-1.5 -7.5
0.8 -6.2-3.6 -19.0
0.4 -1.3

Unemployment rate (%)

2.5

2.4

2.3

2.3

2.4

2.8

2.9

2.5

2.5

2.5

2.4

2.4

2.4

2.4

Core CPI (YoY)

0.8

0.8

0.5

0.6

0.6

0.1

0.0

-0.7

-0.8

-0.6

-0.2

0.1

0.3

0.6

0.8

0.8

0.5

-0.4

-0.4

-0.9

-1.0

-0.7

-0.8

-0.6

-0.2

0.1

0.3

0.4

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

-0.1
0.0

-0.1
0.0

-0.1
0.0

US real GDP growth (QoQ annualized)

2.9

1.5

2.6

2.4

-5.0 -31.7

20.0

6.0

5.0

4.2

3.6

3.2

US unemployment rate (%)

3.9

3.6

3.6

3.5

3.8

13.0

10.0

9.0

8.5

7.7

7.0

US core CPI (YoY)

2.1

2.1

2.3

2.3

2.2

1.3

1.6

1.5

1.5

1.5

1.5

(Ex effects of consumption tax hike)Fed rate (Eop)

FY21

FY20

FY21

4.8
4.8
5.5
1.0
0.7
1.9
0.1
13.7
4.0
5.1
11.6
-0.3

-0.2
-0.4
0.2
-0.1
-4.1
0.0
0.3
2.4
0.7
-0.2
0.0
1.6

0.0
0.0
0.0
0.0
-0.4
0.0
0.0
1.0
0.3
0.1
0.0
2.4

2.7

2.4

0.2

0.0

-0.3

-0.1

0.1

0.0

-0.8

-0.1

0.1

0.0

-0.1
0.0

-0.1
0.0

-0.1
0.0

0.0

0.0

0.0

0.0

2.0

2.2

-4.8

3.6

0.3

0.1

6.5

6.0

3.6

10.1

6.8

0.0

0.0

1.5

1.6

2.2

1.5

1.5

0.0

0.0

0.125 0.125 0.125

0.00

0.00

2.375 2.375 1.875 1.625 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125

Assumptions: Forex rate (annual mean): Y107.5/$ in FY20 and Y110.0/$ in FY21
Crude oil price (WTI annual mean): $41.2/bbl in FY20 and $50.7/bbl in FY21
Notes: 1) US GDP on a calendar basis, US unemployment rate is the average for the period, FF rate is at end of year.
2) Actual figures from Cabinet Office (CAO), Ministry of Internal Affairs and Communications (MIC), Ministry of Economy,
Trade and Industry (METI), and Bank of Japan (BOJ). Forecasts by SMBC NIKKO.
Sources: CAO, MIC, METI, BOJ, SMBC NIKKO estimates

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

Our outlook

8
6
4
2
0
-2
Consumption
tax hike-4
Consumption tax hike-6
-8

Covid-19

-10
2012

2013

2014

2015

2016

Private consumption
Capex
Government expenditure
Exports

2017

2018

2019

2020

2021 (FY)

Private residential investment
Private inventory
Imports
Real GDP

Sources: CAO, SMBC NIKKO estimates

3

Comparison w ith
previous forecasts(as at 20 Aug 2020)

APPENDIX
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