【NEWS RELEASE】
September 9, 2019
SMBC Nikko Securities Inc.

Quarterly Economy Outlook for FY 2019-2020 (Update)

September 9, 2019 (JST), “SMBC NIKKO Japan Economic Outlook for FY 2019-2020” has beenreleased, responding to the second preliminary of GDP (April-June 2019 period).

See Domestic Recovery Despite Trade War, Tax Hike Real GDP: +0.8% in FY19 and +0.9% in FY20
 Nominal GDP: +0.8% in FY19 and +1.4% in FY20

SummaryGDP growth outlook
We revise our outlook to reflect the second preliminary Apr-Jun 2019 GDP data. We forecastreal GDP growth of 0.8% YoY in FY19 and 0.9% in FY20, a downward revision of 0.1ppt versus
our previous outlook for FY19 (14 Aug) to reflect a downward revision to capex in response tocorporate financial data.

Current state of the economy
Apr-Jun 2019 real GDP growth (annualized basis) was up 1.3% QoQ, for a third straight quarterof growth. Drivers of domestic demand like private consumption, capex, and public sector
outlays are strong, and the downtrend in exports—the largest drag on the domestic
economy—has faded, largely owing to a pause in the semiconductor-related correction. The
global semiconductor correction reflected declining demand for IT end products (like cellphones and servers), and the upturn in end product demand has now fed through tocomponents like semiconductors. In the past three months global semiconductor sales haverebounded and semiconductor prices have bottomed as well. This suggests the domestic
production correction led by the high-tech field should fade from here.
That said, the external climate still includes many threats such as escalating US-China tradetension and the strong yen. Also, Japan has a consumption tax hike set for 1 Oct. In this light,
Japan's economy will likely continue to face domestic troubles and external threats.

This material is an English translation of Japanese announcement made on September 9, 2019. 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.

Risk factors
Rather than continued escalation of US-China trade tensions, we expect the parties will work
toward an agreement. We think the US's unveiling of a fourth round of tariffs on China on 1 Aug
was prompted by a perceived failure of China to live up to its agreement to purchase US farm
imports. While this might represent a misreading of the data by the US, it suggests the Trumpadministration's decisions are being influenced by the upcoming 2020 presidential race. Still,
the fourth round of tariffs would cover about 40% of consumer goods, and so would likely havea negative impact on the Christmas shopping season if enacted. This suggests further hikes totariffs ahead of year-end will be difficult.
Meanwhile, China lacks effective ways to retaliate against the US. Indeed, any intensification of
the trade war will only accelerate the ongoing trend of firms moving operations outside of China,
accelerating the hollowing out of industry there. If Trump is reelected this situation will only get
more serious. China's best option would be to come to an agreement with the US and get it tolower tariffs, thus avoiding a hollowing out of its industry.
Both the US and China have room to compromise. It makes sense for the US to get China toresume farm product purchases and to avoid widening the scope of tariffed products. This
would be positive both for the US Christmas shopping season and for Trump's reelection
prospects. China, meanwhile, had been purchasing US farm products from the start of the year,
so resuming such purchases would be easy. It could moreover lay the groundwork for a quid
pro quo by the US. We therefore expect US-China trade talks to move toward an agreementfrom here, rather than intensified conflict.
As for Japan's consumption tax hike, this time around we expect no major front loading of
demand nor any significant drop off after the hike. Such trends occur mainly for durable goods,
but in the case of autos, nearly 90% of the additional costs from the consumption tax hike will
be offset by automobile tax cuts, so we expect no significant demand rush. For housing
investment, meanwhile, policies such as longer mortgage tax reduction periods and expanded
housing subsidies will make it more beneficial to purchase housing after the tax hike, so weexpect no significant demand rush here either.

Outlook for the economy
We expect the upturn in the semiconductor cycle will drive a cyclical recovery for Japan'seconomy. As for the trade war, both the US and China have room to compromise, so we expect
they will work towards a breakthrough. We expect the consumption tax hike this Oct will bringno major demand rush or drop off. Even if the economy does turn down, the government could
unveil further stimulus measures or additional BOJ stimulus at the extraordinary Diet session
this autumn. We expect Japan's economy will not fall into recession but rather will enjoy asustained mild recovery with nearly 1% growth.

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

2019

2018

2020

2021

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

Real GDP growth (QoQ)

-0.1

0.5

-0.5

0.4

0.5

0.3

-0.2

0.1

0.0

0.3

0.6

-0.2

0.7

(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)

-0.6
-0.2
-0.1
-2.6
0.6
-0.9
0.1
1.0
0.6
-0.1
-0.9
4.3

1.9
0.5
0.3
-1.8
3.0
-1.4
0.0
0.8
0.8
0.2
0.8
3.4

-1.9
-0.3
-0.1
0.8
-2.8
-1.8
-0.2
-2.1
-1.2
-0.5
-0.7
0.4

1.8
0.8
0.4
1.3
3.0
-1.2
-0.4
1.2
3.6
0.4
1.3
-2.3

2.2
0.1
0.0
0.8
-0.2
1.5
0.4
-2.0
-4.3
1.0
-2.5
2.8

1.3
0.6
0.6
0.1
0.2
1.8
-0.3
0.0
1.7
0.3
0.7
0.6

-0.9
-0.7
-0.9
0.0
-0.5
0.8
0.5
0.0
-3.0
-0.7
0.3
3.6

0.5
0.6
0.9
-1.5
0.0
0.5
-0.5
0.0
3.0
0.6
2.5
-3.3

0.2
0.1
-0.3
-0.5
0.5
0.0
0.0
0.3
0.5
-0.3
-2.0
-2.5

1.3
0.3
0.2
-0.5
0.5
-0.2
0.0
0.5
0.5
0.6
0.0
-2.5

2.4
0.5
0.50.5
0.8
-0.5
0.1
0.8
0.5
0.8
2.0-2.1

-0.7
-0.2
-0.8
0.5
0.5
-0.5
0.1
0.8
0.5
0.1
1.0-1.3

2.7
0.6
0.7
0.5
0.5
-0.5
0.1
0.8
0.5
0.6
1.0-0.4

FY18

0.7
0.7
0.4
-4.3
3.5
-4.0
0.0
1.5
2.1
0.5
0.2
1.1

FY19

0.8
0.8
0.6
0.6
0.5
3.1
0.0
-1.2
-1.0
0.8
0.2
-0.4

FY20

Comparison w ith
previous forecasts(as at 14 Aug 2018)

FY19

FY20

0.9
0.9
0.8
-0.9
1.7-0.10.0
2.4
1.9
1.4
2.1
-1.6

-0.1
-0.1
0.1
0.0
-1.8
1.0
0.0
0.0
0.0
-0.1
0.1
0.0

0.0
0.0
0.1
0.0
0.0
0.0
0.0
0.0
0.0
0.1
0.0
0.0

Unemployment rate (%)

2.5

2.4

2.4

2.4

2.4

2.4

2.2

2.4

2.4

2.3

2.3

2.3

2.3

2.4

2.3

2.3

-0.1

0.0

Core CPI (YoY)

0.9

0.8

0.9

0.9

0.8

0.8

0.5

1.5

1.7

1.7

1.8

0.7

0.7

0.8

1.1

1.2

0.0

0.0

(Ex effects of consumption tax hike)

0.9

0.8

0.9

0.9

0.8

0.8

0.5

0.5

0.7

0.7

0.8

0.7

0.7

0.8

0.6

0.7

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
0.0

-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

0.0

0.0

0.0

0.0

US real GDP growth (QoQ annualized)

2.5

3.5

2.9

1.1

3.1

2.0

2.3

2.22.1

2.1

2.1

2.1

2.1

2.7

2.2

2.1

0.0

0.0
0.0

US unemployment rate (%)

4.1

3.9

3.8

3.8

3.9

3.6

3.6

3.6

3.6

3.5

3.5

3.4

3.4

3.9

3.6

3.4

0.0

US core CPI (YoY)

1.9

2.2

2.2

2.2

2.1

2.1

2.1

2.2

2.2

2.3

2.3

2.3

2.3

2.2

2.2

2.3

0.0

0.0

2.375 1.625 1.875

0.00

0.00

Fed rate (Eop)1.625 1.875 2.125 2.375 2.375 2.375 1.875 1.625 1.625 1.625 1.625 1.875 1.875

Assumptions: Forex rate (annual mean): JPY108.9/USD in FY19 and JPY113.3/USD in FY20; Crude oil price (WTI annual mean): USD57.9/bbl
in FY19 and USD58.9/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 fromCabinet Office (CAO), MIC, METI, BOJ. Forecasts by SMBC NIKKO.
Sources: CAO; Ministry of Economy, Trade and Industry (METI); Ministry of Internal Affairs and Communications (MIC); Bank of Japan(BOJ); SMBC NIKKO forecasts

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

5Our outlook

43

1.9

20.7

0.8

0.9

10-1Consumption
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

Sources: CAO, SMBC NIKKO forecasts

3(FY)APPENDIX
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