【NEWS RELEASE】
May 21, 2021
SMBC Nikko Securities Inc.

Quarterly Economic Outlook for FY2021-2022

May 21, 2021(JST), “SMBC NIKKO Japan Economic Outlook for FY2021-2022” has beenreleased, responding to the first preliminary of GDP (January-March 2021 period)

Vaccine Progress Getting Japan’s Economy Back on Track◆Real GDP: FY21 +3.0%, FY22 +2.6%◆Nominal GDP: FY21 +3.6%, FY22 +3.3%

SummaryGDP growth rate outlook
We revise our outlook to reflect the first preliminary Jan-Mar 2021 GDP data. We forecast real
GDP growth of +3.0% YoY in FY21 and +2.6% in FY22, down 0.7ppt for FY21 and up 1.0ppt for
FY22 from our previous estimates (10 Mar). We expect Japan’s third state of emergency
declaration to weaken private-sector consumption and now see the economic recovery coming
at a later point and thus lower our outlook for FY21.

This material is an English translation of Japanese announcement made on May 21, 2021. 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.



Economic outlook
Jan-Mar real GDP declined 5.1% QoQ annualized, as the third wave of Covid-19 forced asecond lockdown. We think GDP will continue to slump in Apr-Jun as the spread of the fourthwave has resulted in a third state of emergency and subsequent lockdowns.
The fourth wave is being driven mainly by the UK variant of the virus, though we note that incountries where vaccinations have made good progress there has been a clear decline in thenumber of cases. Israel has now vaccinated an impressive 62.8% of its population, and thenumber of new positive cases is practically zero. In contrast, Japan’s vaccination rate stands atonly 3.9%, with the country unable to prevent the spread of the UK variant.
The reason why Japan’s vaccination rate is so low is insufficient supply from pharmaceuticalcompanies, though Japan’s supply is expected to increase considerably from mid-May. Ifnationwide distribution of the vaccines goes as planned, then Japan should be able to carry out
roughly 37.2mn vaccinations per month from June. The problem is whether local municipalities
have the capacity to administer the vaccinations, though we estimate that vaccination capacity
over a one-month period could be as high as 100mn based on plans for local vaccination
centers, the number of participating doctors and nurses, and the number of shots that can begiven. Vaccination capacity surpasses vaccine delivery volume, so we doubt there will be amajor delay in rolling out vaccinations.
Getting Japan’s elderly population vaccinated is critical. Younger people who contract Covid-19
often show no symptoms or only mild ones, but the virus can easily incapacitate seniors. In fact,
the elderly account for 96% of Covid-related deaths in Japan. The government aims to have allof Japan’s elderly population vaccinated by end-July, but that schedule could be delayed given
the difficulties at the start of a large-scale vaccination program. We assume that vaccination of
the elderly will be completed sometime between mid-August and mid-September after taking
the following factors into consideration: current vaccine distribution plans and vaccination“infrastructure” and manpower at local municipalities, the government’s target for completion,and current distribution plans and delays with vaccines.
The threat of the pandemic will diminish considerably once the elderly have been vaccinated,allowing the economy to normalize. We anticipate a clear economic recovery for Japan fromaround early autumn.

RisksThe main risk is inflation spurring higher interest rates. Commodity prices are surging, but thisalone is unlikely to lift general prices higher. Demand for durable goods during the pandemic
has soared, pushing commodity prices higher. However, this demand should wind down as
major economies get the pandemic under control, with commodity prices likely to peak.
After returning to normal, however, the world’s leading economies could start to overheat if
excess savings fueled by massive stimulus programs prompt people to go out and spend. The
Fed’s economic outlook has US real GDP exceeding potential GDP in Oct-Dec 2021 with theeconomy shifting to excess demand. It projects the inflation gap will reach 3.5% at end-2022.
Other concerns of the Fed seem to be fading as higher unemployment benefits end in
September and the semiconductor shortage gets resolved. We may see Fed Chairman Powellgive a signal on tapering at the Jackson Hole Symposium at the end of August, and US
long-term interest rates could rise again toward end-2021.

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Quarterly forecasts for Japanese economy
2020

2021

2022

2023

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

-0.5

-8.1

5.3

2.8

-1.3

-0.7

1.9

0.9

0.8

0.7

0.3

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 (YoY)
Trade balance (Y tn, SAAR)

-1.9
-0.2
-0.8
-3.7
1.3
0.6
-0.3
-4.7
-3.0
-0.5
-4.7
1.3

-28.6
-5.2
-8.3
0.6
-6.1
2.1
-2.9
-17.5
-0.7
-7.8
-20.7
-9.7

22.9
2.6
5.1
-5.7
-2.1
0.7
2.6
7.3
-8.2
5.5
-12.7
3.3

11.6
1.82.2
0.1
4.3
1.1
1.0
11.7
4.8
2.4
-4.2
8.0

-5.1
-1.1
-1.4
1.1
-1.4
-1.1
-0.3
2.3
4.0
-1.6
-1.3
3.4

-2.6
-1.0
-1.2
1.0
0.0
0.6
0.3
2.0
0.0
0.0
19.3
4.2

7.7
1.8
2.7
1.5
2.0
0.2
0.1
2.0
1.5
2.0
10.0
4.7

3.7
1.0
1.5
1.0
1.0
-0.2
-0.1
1.0
1.5
1.1
5.1
4.1

3.2
0.9
1.2
1.0
1.0
-1.2
-0.1
0.5
1.0
0.9
4.6
3.6

2.7
0.8
1.0
0.8
0.8
-0.7-0.1
0.5
1.0
0.8
4.0
3.0

1.3
0.4
0.5
0.0
0.5
-0.7
-0.1
0.5
1.0
0.5
3.5
2.4

1.2
0.4
0.5
-1.0
0.5
-0.7
-0.1
0.5
1.0
0.4
3.0
1.8

1.1
0.4
0.5
-1.5
0.5
-0.7
-0.1
0.5
1.0
0.4
2.0
1.2

Unemployment rate (%)

2.4

2.7

3.0

3.0

2.8

2.9

2.8

2.7

2.7

2.6

2.6

2.5

2.5

Core CPI (YoY)

0.6

0.1

-0.2

-0.9

-0.4

-0.6

-0.2

0.1

0.3

0.5

0.6

0.8

0.9

-0.4

-0.9-1.2

-0.9

-0.4

-0.6

-0.2

0.1

0.3

0.5

0.6

0.8

0.9

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

US real GDP growth (QoQ annualized)

-5.0

-31.4

33.4

4.3

6.4

9.4

6.8

4.8

3.7

3.0

2.5

US unemployment rate (%)

3.8

13.0

8.8

6.7

6.2

6.1

5.8

5.2

4.8

4.4

2.21.3

1.7

1.6

1.4

3.0

3.1

3.2

3.2

2.2

(Ex effects of consumption tax hike)

US core CPI (YoY)
Fed rate (Eop)

FY20

FY21

-4.6
-4.0
-6.0
-7.1
-6.9
4.0
-0.6
-10.4
-6.8
-4.0
-9.9
1.2

FY22

Comparison w ith
previous forecasts(as at 10 Mar2021)

FY21

FY22

3.0
2.9
3.1
2.3
2.8
0.2
0.1
13.5
5.4
3.6
9.4
4.1

2.6
2.6
4.1
1.5
3.3
-2.7
0.0
2.6
4.4
3.3
3.1
2.1

-0.7
-0.9
-0.6
0.9
-1.4
-1.80.2
0.4
-1.5
-0.4
1.4
-0.6

1.0
1.0
0.9
0.0
0.4
0.0
0.0
0.0
-0.4
1.0
0.0
-2.2

2.9

2.8

2.5

0.0

0.0

-0.4

-0.1

0.7

0.0

0.0

-0.9

-0.1

0.7

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

2.5

2.5

-3.5

6.6

4.3

1.9

0.7

4.2

4.0

3.8

8.1

5.8

4.4

-0.3

-0.9

2.2

2.0

2.0

1.7

2.7

2.4

1.2

0.6

0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.125 0.375 0.375 0.625

0.125

0.125

0.375

0.00

0.00

Assumptions: Forex rate (annual mean): Y110.0/$ in FY21 and Y112.9/$ in FY22.
Crude oil price (WTI annual mean): $62.5/bbl in FY21 and $60.0/bbl in FY22.
Notes: US GDP on a calendar basis, US unemployment rate is the average for the period, FF rate is at end of year.
Sources: Cabinet Office, Ministry of Internal Affairs and Communications,
Ministry of Economy, Trade and Industry, and Bank of Japan, SMBC NIKKO estimates

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

Our outlook

86

3.0 %
2.6 %

420-2Consumption
tax hike-4-6-4.6 %-8Covid-19-10
2015

2016

2017

2018

2019

Private consumption
Capex
Government expenditureExports

2020

2021

2022

Private residential investm ent
Private inventory
Imports
Real GDP

Sources: Cabinet Office, SMBC NIKKO estimates3(FY)APPENDIX
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