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

Solid Domestic Economy and Heightening Overseas Risks
 Real GDP: +1.0% in FY18 and +1.0% in FY19
 Nominal GDP: +1.3% in FY18 and +2.5% in FY19

SummaryGDP growth outlook
We revise our economic outlook in light of the first preliminary estimate for Apr-Jun 2018 GDP.
We forecast real GDP growth of +1.0% in FY18 and +1.0% in FY19, downward revisions of
0.2ppt and 0.1ppt, respectively, from our previous outlook (as of 8 Jun). For FY18, we
downgrade our export outlook in light of slowing exports, while for FY19, we make minor
revisions to items like residential investment.



Domestic economy is solid
Domestic demand in the Japanese economy is strong. Private consumption is a function ofincome, so while it does not give rise to economic cycles, sharp growth in employee incomes isstabilizing the economy. For capex, the ratio of capital stock to GDP is at the lowest level in 20
years, meaning the economy suffers from underinvestment. The upward leg of the capital stock
cycle is still in the early stages and should be sustainable. On the other hand, the recovery inexternal demand is slowing from the torrid pace seen in 2017. There is still risk of fallout fromtrade disputes and the Turkey shock, so we advise caution.
For inflation, upward price momentum is gradually strengthening, centered on goods andservices for which supply-demand is improving. Even so, we do not expect the BOJ's 2%
inflation target to be reached until at least FY21. Wages are rising on the back of rising prices
and productivity. We expect wage growth to gradually accelerate based on moderate inflationand productivity improvements driven by personnel shortages.

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.

At its July monetary policy meeting, the BOJ introduced a new framework to enhance thesustainability of monetary easing. By allowing greater fluctuations in interest rates and ETF
purchases, the BOJ has ultimately given itself room to continue QE for longer by reducing JGB
and ETF purchases. That said, BOJ purchases of JGBs are already running at a lower pacethan new JGB issuance, meaning it would have been able to continue JGB purchases even
without the new framework (taken to its logical extreme, QE could be continued indefinitely). In
this regard, the policy adjustment ultimately appears to be a rescue for financial institutions by
allowing interest rates to rise.
In terms of future interest-rate hikes, the BOJ has newly introduced forward guidance. Its
forward guidance at present is that "The Bank intends to maintain the current extremely low
levels of short- and long-term interest rates for an extended period of time". The market
currently takes "an extended period of time" to mean one year and nine months, forecasting a
rate hike in May 2020. This would be seven months after the consumption tax hike, which looks
reasonable to us. If this forecast remains unchanged, there should be no increases in long-term
interest rates driven by rate-hike expectations.
That said, the BOJ's decision to allow some fluctuation in interest rates means that domestic
interest rates are likely to be even more strongly influenced by overseas interest rates. Moving
forward, we think overseas interest rates are likely to be a more important factor than the JGB
market and BOJ moves.


Heightening overseas risks
Overseas risks now include the Turkey shock in addition to trade disputes. On the trade war
front, we calculate combined macro (GDP growth) impact from four trade policy measures—1)
US tariffs on steel and aluminum imports, 2) US tariffs against China, 3) Chinese retaliatory
tariffs, and 4) US tariffs on automobile imports—at -0.35ppt for the US, -0.96ppt for China, and-0.09ppt for Japan. China, which has relatively smaller scope for levying tariffs against the US,
stands to be more heavily impacted. That said, the impact on GDP growth is essentially a
one-year phenomenon and will not persist in the long term. We therefore advise against
excessive pessimism.
Meanwhile, the Turkey shock is fundamentally different from typical emerging market crises.
Typical crises are caused by dollar shortages, usually when US rate hikes mean thatinvestment money is sucked up from around the world into the US. This time though, USinterest rates are not rising; in fact, they are falling. The US is not sucking up funds from aroundthe world—investment money is fleeing from Turkey of its own accord, scared off bydeteriorating external balances and inflation. Rising long-term interest rates signify that markets
are calmly working to stem deterioration in external balances in place of the Turkish central
bank. Real long-term interest rates have risen to 6.2% at present, closing on the real growthrate of 7.4%. We would expect the market adjustment to finish if slowdowns in economic
indicators are confirmed.
Of note, claims against Turkey at European banks amount to only 2.1% of total lending even at
Spanish banks, which have the largest exposures, and exposures for Italy, Germany, andFrance are less than 0.5%. We therefore see little risk that the Turkey shock will spill over toEurope and the rest of the world.

2

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

2018

2020

2019

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

0.7

0.5

0.6

0.2

-0.2

0.5

0.2

0.4

0.3

0.3

0.5

-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)

2.7
0.6
0.5
0.6
0.8
-0.2
0.1
1.9
1.4
0.2
3.9
4.6

2.1
0.8
0.8
0.5
1.3
5.4
-0.3
0.2
1.9
0.8
5.6
3.7

2.3
0.0
-0.7
1.2
-1.3
-2.9
0.6
2.1
-1.5
0.8
4.4
7.5

0.8
0.3
0.3
0.8
-3.0
-0.6
-0.1
2.1
3.3
0.3
4.1
6.9

-0.9
-0.3
-0.2
0.5
-2.3
-0.4
0.1
0.6
0.2
-0.4
2.5
4.1

1.9
0.6
0.7
1.3
-2.7
-0.1
-0.1
0.2
1.0
0.4
1.5
3.2

0.9
0.2
0.4
0.5
0.5
0.2
0.0
0.5
0.5
0.2
1.9
4.6

1.8
0.4
0.3
0.5
2.0
0.5
0.0
0.5
0.5
1.4
1.3
5.2

1.2
0.4
0.2
0.5
2.0
0.4
-0.1
0.8
1.2
-0.1
3.8
5.5

1.1
0.3
0.1
0.5
3.5
-0.2
-0.1
0.8
1.2
1.2
4.0
5.9

1.9
0.7
0.8
0.5
1.0
0.2
-0.2
0.8
2.0
0.1
4.1
4.8

-1.5
-1.2
-2.5
0.4
-5.0
3.0
0.9
0.8
-4.0
1.0
1.0
10.3

1.3
0.3
0.2
0.4
-3.0
3.0
0.0
0.8
1.0
-0.1
1.0
10.3

FY16

FY17

FY18

FY19

Comparison withprevious forecasts(as at 8 June 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
1.4
0.4
6.3
4.1
1.7
4.1
5.5

1.0
1.0
1.2
3.1
-4.3
-0.6
0.0
3.2
3.1
1.3
2.1
4.6

1.0
1.0
0.3
1.9
3.6
3.2
0.0
3.4
1.8
2.5
2.5
7.8

-0.2
-0.2
0.0
0.5
-1.7
-1.3
0.0
-1.9
-0.6
-0.1
0.0
-1.5

-0.1
-0.1
0.0
-0.1
-0.6
0.7
0.0
-0.2
-0.4
0.1
0.0
-1.3

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

2.1

3.0

2.7

2.3

2.2

-0.1

0.0

Core CPI (YoY)

0.2

0.4

0.6

0.9

0.9

0.8

0.8

1.1

1.1

1.1

1.1

2.2

2.3

-0.2

0.7

0.9

1.7

0.0

0.0

(Ex effects of consumption
tax hike)

0.2

0.4

0.6

0.9

0.9

0.8

0.8

1.1

1.1

1.1

1.1

1.2

1.3

-0.2

0.7

0.9

1.2

0.0

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
0.1

-0.1
0.1

-0.1
0.1

-0.1
0.1

-0.1
0.1

-0.1
0.0

-0.1
0.0

-0.1
0.1

-0.1
0.1

0.0

0.0

0.0

0.0

US real GDP growth (QoQ annualized)

1.8

3.0

2.8

2.3

2.2

4.1

3.0

2.8

2.4

2.3

2.0

2.1

2.1

2.0

2.5

3.0

2.2

0.5

-0.1

US unemployment rate (%)

4.6

4.3

4.3

4.1

4.1

3.9

3.9

3.8

3.8

3.7

3.7

3.6

3.6

4.9

4.3

3.9

3.7

-0.1

0.0

US core CPI (YoY)

2.2

1.8

1.7

1.8

1.9

2.2

2.2

2.3

2.3

2.3

2.2

2.2

2.2

2.2

1.9

2.2

2.3

0.2

0.1

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 2.375

0.25

0.25

Fed rate (Eop)Assumptions: Forex rate (annual mean): Y111.7/USD in FY18, Y114.6/USD in FY19; Crude oil price (WTI annual mean): $70/bbl in FY18 and $65.8/bbl in
FY19.

Note: 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 of Japan(BOJ); SMBC NIKKO forecast

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

5

Our outlook

4
3

1.6
2

1.0
1.0

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 themarket 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 17 August, 2018)(1) Companies under coverage(2) Proportion of stocks of each rating in (1) with IB
relationships

1-Outperform

2-Neutral

3-Underperform

Others

38%

55%

7%

0%

43%

36%

22%

50%

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
performance, and the information contained herein should, for whatever purpose, be used solely at the discretion andresponsibility of the client. Neither SMBC NIKKO nor its affiliates accept any liability or responsibility for any results inconnection with the use of such information. This research report does not take into account specific financial situations,needs, or investment objectives of any client, and it is not intended to provide tax, legal, or investment advice. Clients are
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6

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7