【NEWS RELEASE】
May 23, 2019
SMBC Nikko Securities Inc.

Quarterly Economy Outlook for FY 2019-2020

May 23, 2019 (JST), “SMBC NIKKO Japan Economic Outlook for FY 2019-2020” has beenreleased, responding to the first preliminary of GDP (January-March 2019 period).

Downside Risks Linger, but Economy to Recover Real GDP: +0.8% in FY19 and +0.9% in FY20
 Nominal GDP: +0.7% in FY19 and +1.5% in FY20

SummaryGDP growth outlook
We revise our economic outlook in light of the first preliminary estimate for Jan-Mar 2019 GDP.
We forecast real GDP growth of 0.8% YoY in FY19 and 0.9% in FY20. Compared with ourprevious estimates, we lower FY19 by 0.2ppt and FY20 by 0.1ppt to reflect the hit fromadditional US tariffs on China and the embargo on Huawei.



Exports strongly impact the Japanese economy
Exports are having a major impact on Japan's economy, with real GDP growth sharply slowing
from 1.9% in FY17 to only 0.6% in FY18 due to a slowdown in exports. Real exports grew 6.4%
in FY17 but slowed significantly to 1.3% in FY18, indicating that exports determine economic
momentum.
The slowdown in exports mainly reflects two factors: 1) shifts in the global economy (capex
cycle) triggered by the Fed's switch to monetary tightening in 2015; and 2) corrections in the
global semiconductor cycle. The global and Japanese economies are being impacted by twocycles: investment and semiconductors. However, the negative impact of these two cycles
should subside over time. We estimate that the global economic cycle will turn upward from 2H
2019 and expect the Japanese economy to recover in line with this trend.

This material is an English translation of Japanese announcement made on May 23, 2019. 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.



Risk factors
However, we see the following risks: 1) US sanctions on China; and 2) Japan's consumption
tax hike.
US sanctions on China: The US announced additional tariffs on China and an embargo on
Huawei. As for the Japanese economy, we estimate these moves will curb GDP growth by
0.2ppt and NP for listed companies by around 5.1%. The latest salvo in this trade war will
impact the macro economy to a certain extent but we doubt a recession will occur. The TOPIX's
correction of 5.1% (same pace as NP erosion) from its recent peak looks reasonable for in ourview.
Consumption tax hike: Inflation will rise when the tax is hiked, but with real incomes remaining
up around 1% incomes are unlikely to slide into negative territory (real incomes down 2% at
previous tax hike). Moreover, the government plans stimulus measures worth Y4.8tn,
compared to an estimated Y2.2tn increased burden on households from the tax hike, whichnets out to fiscal expansion of +Y2.6tn. The last time around the net impact would have beenfiscally contractionary (-Y8tn), so the fiscal stance differs this time around. A consumption tax
hike has an economic contractionary impact, but this time thanks to government stimulus thenet impact will be expansionary. In that light, we expect the upcoming tax hike will not derail the
economy.

###2

Quarterly forecasts for Japanese economy《Actual》← →《Forecasts》
2018《A》← →《F》 (Unit:%)

2019

2020

2021

FY18

FY19

FY20

1.3
0.4
0.2
1.0
0.5
-0.5
0.0
0.2
0.5
0.2
4.1
2.2

0.6
0.6
0.4
-4.2
3.2
-3.8
0.0
1.3
2.0
0.5
1.0
1.1

0.8
0.8
1.1
-0.4
1.2
3.4
0.0
-1.8
-1.3
0.7
2.1
1.0

0.9
0.9
0.4
-1.1
1.8
0.5
0.0
2.8
1.7
1.5
2.1
1.3

2.3

2.3

2.4

2.4

2.3

0.6

0.8

0.8

0.5

0.9

0.2

0.6

0.8

0.8

-0.0

0.4

-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

2.2

2.2

2.2

2.2

2.2

3.3

2.4

2.2

3.6

3.5

3.5

3.4

3.4

3.9

3.6

3.4

2.2

2.3

2.3

2.3

2.3

2.2

2.2

2.3

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

-0.1

0.5

-0.6

0.4

0.5

0.2

-0.4

1.4

-0.9

0.5

0.3

0.4

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)

-0.3
-0.1
-0.1
-2.4
1.2
-1.3
0.0
1.0
0.7
-0.2
2.1
4.4

2.2
0.6
0.6
-2.1
2.4
-0.7
-0.1
0.7
1.0
0.3
1.1
3.0

-2.5
-0.4
-0.3
0.8
-2.5
-1.9
-0.2
-2.0
-1.0
-0.6
0.5
0.2

1.6
0.7
0.2
1.4
2.5
-1.4
-0.3
1.2
3.0
0.5
0.5
-1.9

2.1
0.2
-0.1
1.1
-0.3
1.5
0.4
-2.4
-4.6
0.8
1.9
3.0

0.7
0.7
1.5
3.0
0.0
1.0
-0.5
-1.0
2.0
-0.5
1.4
1.3

-1.6
-0.9
-2.0
-4.0
0.5
2.0
0.5
0.0
-3.0
-0.3
2.4
4.5

5.6
1.7
2.7
-4.0
0.8
1.0
-0.3
1.0
3.0
1.9
3.6
-1.2

-3.6
-1.0
-2.0
0.0
0.0
0.0
0.1
0.8
0.5
-1.2
1.1
-0.6

1.9
0.4
0.3
0.5
0.5
-0.2
0.0
0.5
0.3
0.8
0.8
0.3

1.2
0.3
0.1
1.0
0.5
-0.5
0.0
0.5
0.5
0.5
2.5
1.0

1.5
0.4
0.2
1.0
0.5
-0.5
0.0
0.5
0.5
0.7
1.0
1.8

Unemployment rate (%)

2.5

2.4

2.4

2.4

2.4

2.5

2.4

2.4

2.4

2.3

2.3

Core CPI (YoY)

0.9

0.8

0.9

0.9

0.8

0.3

0.2

0.7

0.8

1.0

1.2

0.9

0.8

0.9

0.9

0.8

0.3

0.2

-0.3

-0.2

0.0

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

US real GDP growth (QoQ annualized)

2.2

4.2

3.4

2.2

3.2

2.6

2.5

2.3

US unemployment rate (%)

4.1

3.9

3.8

3.8

3.9

3.6

3.6

3.6

US core CPI (YoY)

1.9

2.2

2.2

2.2

2.1

2.1

2.1

2.2

(Ex effects of consumption tax hike)Fed rate (Eop)1.625 1.875 2.125 2.375 2.375 2.375 2.375 2.375 2.375 2.625 2.625 2.625 2.625

2.375 2.375 2.625

Assumptions: Forex rate (annual mean): Y112.8/$ in FY19 and Y115.0/$ in FY20; Crude oil price (WTI annual mean): $64.0/bbl in FY19 and$66.0/bbl in FY20.
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; Ministry of Economy, Trade and Industry (METI); Ministry of Internal Affairs and Communications (MIC); Bank ofJapan (BOJ); SMBC NIKKO forecast

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

5

Our outlook

4
3

1.9

2

0.6

0.8

0.9

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

-2
-3
2012

2013

2014

2015

2016

Private consumption
Capex
Government expenditure
Exports

2017

2018

2019

2020

Private residential investm ent
Private inventory
Imports
Real GDP

Source: CAO, SMBC NIKKO forecast

3

(FY)

APPENDIXANALYST'S CERTIFICATION
Each analyst shown on the first page of this research report prepared and issued by SMBC Nikko Securities Inc. (“SMBC NIKKO”) is primarily
responsible for the preparation and content of this research report. Each analyst certifies that the opinions contained herein accurately reflect theanalyst's individual views for the subject securities and issuers. Each analyst also certifies that no part of the analyst's compensation was in thepast, 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 medianinvestment 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 with themedian 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 medianinvestment 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 (defined as 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 with themarket 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 inline 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.

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 ofeach 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 22 May, 2019)
1-Outperform

2-Neutral

3-Underperform

Others(1) Companies under coverage

34%

56%

8%

1%

(2) Proportion of stocks of each rating in (1) with IB relationships

42%

36%

27%

29%

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, is based upon (among otherfactors) the overall profitability of SMBC NIKKO, which includes the overall profitability of investment 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 a request 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 avariety 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 those stocks/sectors in question. Accordingly, stock/sector recommendations andshare price forecasts based on the technical analysis 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 constitute solicitation of the sale orpurchase of securities or other investments. The information contained herein is derived from sources 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 orsummarized. Prices, numbers, and similar data contained herein include past results, estimates, and forecasts, all of which may differ from actual4

data. These prices, numbers, and similar data may also change without prior notification. This research report does not guarantee future
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Neither SMBC NIKKO nor its affiliates accept any liability or responsibility for any results in connection with the use of such information. This
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Aforementioned commissions and risks differ by financial instrument and clients should carefully examine all relevant documentation, including
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Local Finance Bureau, Registration No. 2251.

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