【NEWS RELEASE】
March 8, 2019
SMBC Nikko Securities Inc.
Quarterly Economy Outlook for FY 2018-2020 （Update）
March 8, 2019 (JST), “SMBC NIKKO Japan Economic Outlook for FY 2018-2020” has beenreleased, responding to the second preliminary of GDP (October-December 2018 period).

Robust Japanese economy and three risks
 Real GDP: +0.6% in FY18, +1.0% in FY19 and +1.0% in FY20
 Nominal GDP: +0.2% in FY18, +1.0% in FY19 and +1.6% in FY20

SummaryGDP growth outlook
We revise our economic outlook in light of the second preliminary estimate for Oct-Dec 2018
GDP. We forecast real GDP growth of +0.6% YoY in FY18, +1.0% in FY19, and +1.0% in FY20.
Compared with our previous estimates, we lift FY18 by 0.1ppt but trim FY19 by 0.1ppt. For
FY18, we upgrade our view on inventory, while for FY19 we downgrade our view on exports
and public sector investment.



Ongoing recovery for Japanese economy
We expect a sustained recovery for Japan's economy, with growth of 1% into FY20. We see an
absence of excesses in the economy driving a stable and prolonged recovery. Capex is the
keystone of the economic cycle and we see no sign of excess production capacity with thecapital stock/GDP ratio at its lowest in 20 years. The business cycle is usually driven by theinvestment cycle, so if capex stops circulating, then the real economy will come to a halt as well.
In other words, we think the economy is on a rebound trend. This has been a characteristic of
the global economy in recent years.
Private consumption, another pillar of domestic demand, is at historically high levels as
increased wages and employment lifts purchasing power. We expect the spring wage
negations to lift wages by roughly +2.7%, which should translate into a gain of about +1.9% for
the macro wage (wages across the whole economy). The consistently tight labor market has

This material is an English translation of Japanese announcement made on March 8, 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.

increased labor force participation and therefore labor supply. We expect private consumption
to grow as favorable wages/employment conditions sustain increased purchasing power.


We expect inflation to slow in 2019 on lower energy prices, reduced mobile phone fees, andfree preschool education after the consumption tax hike. We thus expect the BOJ to maintaincurrent monetary policy. Given that the theoretical target for the long-term interest rate iscurrently about 0%, the BOJ will likely try to keep the 10y JGB yield at around 0% too. We also
expect the BOJ to continue ETF purchases above the current rate of Y6tn. We assume theY/$ rate moves within the Y108-112 range throughout the year.



Risks factors
Risk factors include 1) the consumption tax hike, 2) Chinese economic slowdown, and 3)
financial market turmoil and the US economy
We expect the consumption tax hike to add a Y2.2tn burden to household budgets. We also
assume a government stimulus package of Y4.8tn for a net increase in fiscal spending of+Y2.6tn. Net government spending fell about -Y8tn last time the tax was raised, which hurt theeconomy, but this time should be different, in our view.
The current slowdown in the Chinese economy largely owes to a lull in stimulus policy. Autos
sales dropped off after the end of tax breaks, and infrastructure spending fell as the central
government prioritized debt reduction. However, the autos drop-off is roughly 80% done and is
beginning to taper. The government has also rolled out more demand stimulus, so autos
demand is likely to recover. It has also adjusted policy so that local governments can issue
bonds for increased fund procurement. It has therefore revised policy from reduced spending
through 2018, and now aims to get the economy out of the lull with fiscal expansion.
We believe recent turmoil in financial markets is closely related to the US economy. Given that
this economy is already in a state of excess demand, persistent growth over 2% (potential
growth rate) would expand the inflation gap and drive up the long-term interest rate. A
long-term interest rate above the neutral rate results in a volatility surge and directly impacts
financial markets (given the dominance of low-volatility strategies). This is the macroeconomic
backdrop for the market slump in autumn 2018, so a potential surge in the US economy could
have the same implications. Among other things, we will watch monetary policy by the Federal
Reserve to see if the US economy can execute a soft landing to a growth rate that is just right at
about 2%.

2

Quarterly forecasts for Japanese economy《Actual》← →《Forecasts》
2018《A》← →《F》

2019

2020

2021

FY17

FY18

(Unit:%)

FY19

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

-0.1

0.5

-0.6

0.5

0.0

0.9

-1.1

2.3

-1.1

0.3

0.4

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)

-0.4
-0.2
-0.2
-2.0
1.0
-0.7
0.1
0.4
0.0
-0.3
2.0
4.2

1.9
0.6
0.6
-2.0
2.5
-0.7
-0.1
0.4
1.3
0.4
1.3
2.8

-2.4
-0.5
-0.2
0.6
-2.6
-2.3
-0.1
-1.4
-0.7
-0.5
-0.1
0.5

1.9
0.8
0.4
1.1
2.7
-1.7
-0.3
1.0
2.7
0.4
0.7
-2.2

-0.1
0.1
0.4
3.0
0.2
0.5
-0.1
-0.5
0.0
-0.4
2.3
3.1

3.5
0.8
0.8
2.0
0.8
1.0
0.0
1.2
1.0
1.0
1.4
4.1

-4.2
-1.0
-2.2
-4.0
1.0
2.0
-0.1
0.8
1.5
-1.0
3.1
3.5

9.5
1.7
2.7
-3.0
0.6
1.0
0.6
0.8
-2.5
2.8
3.6
3.3

-4.2
-1.0
-2.0
-1.0
0.0
0.0
-0.1
0.8
1.2
-1.4
1.1
3.1

1.3
0.3
0.2
0.5
0.5
-0.2
0.0
1.0
1.0
0.6
0.8
3.9

1.7
0.4
0.4
0.5
0.5
-0.5
0.0
1.0
1.0
0.6
2.5
4.7

1.3
0.3
0.3
0.5
0.5
-0.5
0.0
0.8
1.0
0.6
1.0
5.3

1.3
0.3
0.3
0.5
0.5
-0.5
0.0
0.8
1.0
0.2
4.1
5.9

1.9
1.5
1.1
-1.3
5.5
0.5
0.4
6.4
4.0
2.0
1.0
1.3

0.6
0.6
0.7
-4.4
4.4
-4.0
0.0
1.7
3.1
0.2
1.0
1.1

1.0
1.0
0.8
-0.5
3.6
2.2
0.0
2.5
2.0
1.0
2.3
3.5

Unemployment rate (%)

2.5

2.4

2.4

2.4

2.5

2.5

2.4

2.4

2.4

2.3

2.3

2.3

2.3

2.4

2.5

Core CPI (YoY)

0.9

0.8

0.9

0.9

0.6

0.3

0.2

0.7

0.8

1.0

1.2

0.6

0.8

0.7

0.8

0.9

0.8

0.9

0.9

0.6

0.3

0.2

-0.3

-0.2

0.0

0.2

0.6

0.8

0.7

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)

2.2

4.2

3.4

2.6

2.7

2.6

2.5

2.3

2.2

2.2

2.2

2.2

US unemployment rate (%)

4.1

3.9

3.8

3.8

3.6

3.6

3.6

3.6

3.6

3.5

3.5

US core CPI (YoY)

1.9

2.2

2.2

2.2

2.1

2.0

2.0

2.0

2.0

2.2

2.3

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

FY20

Comparison w ith previous
forecasts(as at 20 Feb 2018)

FY18

FY19

FY20

1.0
1.0
0.3
-2.7
2.7
0.4
0.0
4.0
2.2
1.6
2.1
5.0

0.1
0.1
-0.1
0.0
0.3
-0.4
0.0
-0.3
-0.1
0.0
0.0
-0.2

-0.1
-0.1
-0.1
0.0
-0.1
-0.4
0.0
-0.6
-0.4
-0.1
0.0
-0.4

0.0
0.0
0.0
0.0
-0.2
0.0
0.0
0.0
0.0
0.0
0.0
-0.4

2.4

2.3

0.1

0.1

0.1

0.5

0.9

0.0

0.0

0.0

0.8

-0.0

0.4

0.0

0.0

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

0.0

0.0

2.2

2.5

3.1

2.5

2.2

-0.1

0.0

0.0

3.4

3.4

4.4

3.9

3.6

3.5

0.0

0.0

0.0

2.2

2.2

1.9

2.1

2.0

2.2

0.0

0.0

0.0

1.375 2.375 2.625 2.875

0.00

0.00

0.00

1.625 1.875 2.125 2.375 2.375 2.375 2.375 2.625 2.625 2.875 2.875 2.875 2.875

Assumptions: Forex rate (annual mean): Y110.9/USD in FY18, Y112.6/USD in FY19, Y115.0/USD in FY20; Crude oil price (WTI annualmean): $60.7/bbl in FY18, $54.9/bbl in FY19 and $58.9/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.
Source: Cabinet office; Ministry of Economy, Trade and Industry (METI); Ministry of Internal Affairs and Communications (MIC); Bank ofJapan(BOJ); SMBC NIKKO estimates

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

5

Our outlook

4
3

1.9

2

0.6

0.9

1.0

1.0

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)

ANALYST'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 the medianinvestment 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 the 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 linewith 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 07 March, 2019)
1-Outperform

2-Neutral

3-Underperform

Others(1)Companies under coverage

37%

54%

9%

1%

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

43%

36%

19%

0%

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.
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Clients may request all relevant and current disclosures by contacting a SMBC NIKKO or branch representative, or by sending a request to the following
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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 or This
research report has been produced by SMBC NIKKO for informational purposes only. It does not constitute solicitation of the sale or purchase of4

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