【NEWS RELEASE】 May 23, 2022 SMBC  Nikko  Securities  Inc. Quarterly Economic Outlook for FY2022-2023 May 23, 2022(JST), “SMBC NIKKO Japan Economic Outlook for FY2022-2023” has been released, responding to the first preliminary of GDP (January-March 2022 period) Gradual Recovery as Covid Lingers Real GDP: FY22 +2.1%, FY23 +1.8% ◆ Nominal GDP: FY22 +2.0%, FY23 +2.5% Summary GDP growth outlook We revise our outlook to reflect the first preliminary Jan-Mar 2022 GDP data. We forecast real GDP growth of +2.1% YoY in FY22 and +1.8% in FY23. We cut our FY22 forecast by 0.9ppt from our previous forecast (9 March) mainly to reflect downward revisions to public investment. Share the Future This material is an English translation of Japanese announcement made on May 23, 2022. Although the company intended to faithfully 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.
Economic outlook
Real GDP shrank by 1.0% QoQ in Jan-Mar, the first decline in two quarters, reflecting economic restrictions from CV19. Key points ahead will be CV19, faster inflation, and easing supply constraints. CV19: The mortality rate for CV19 has fallen to about 0.01%, about 1/10 that of influenza. The rate of serious cases is also low at 0.02%. Private consumption was nearly flat QoQ in Jan-Mar, possibly due to lower CV19 risk. If variants continue to weaken in virulence, the risk of medical collapse falls and economic activity should normalize. Inflation: Inflation concerns are high now, but we think a slump in consumption due to inflation is unlikely. Households currently have purchasing power of around Y311tn but consumption is only around Y293tn, leaving Y18tn in untapped purchasing power. Assuming this year's inflation rate is +1.6% YoY (consensus), households' real disposable income would decline by about Y5tn, but there would be a surplus of Y18tn in purchasing power. If we consider the Y47tn in excess savings, there is even more leeway. Purchasing power is more than adequate, so we do not expect consumption to be constrained by income. Supply constraints: Auto production supply constraints continue to curb domestic sales and exports. Semiconductor supply/demand is key and we expect it will gradually loosen as WFH/stay-home high-tech demand fades globally as the Omicron wave subsides, and as global semiconductor majors increase capex. In sum, we expect a solid recovery in the Japanese economy driven by waning CV19 virulence, sufficient purchasing power to withstand inflation, and easing supply constraints.
US inflation and rate hikes
Rate hikes: Inflation in the US is not due to overheating demand, but rather a shortage of supply, making it difficult for rate hikes to curb inflation. Meanwhile, services prices account for about 70% of current inflation, but as s ervices are not something you borrow to pay for the impact of rate hikes would be small. As a result, Fed rate hikes may be larger than normal. Markets are currently pricing in a rate hike to 3.05%, but the Taylor Rule implies a hike to 3.6%. Rate hikes are a way to quide the economy to a sustainable growth path, and we do not expect the economy to fall into recession. However, the scale of rate hikes this time around is larger and could have a direct impact on markets. Forex: If the Fed hiked the FF rate to 3.6%, the US/Japan interest rate differential would widen, and the yen could weaken to around Y133/$.
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Crude oil price (WTI annual mean): $93/bbl in FY22 and $85/bbl in FY23. 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
Sources: Cabinet Office, SMBC NIKKO estimates
APPENDIX
This research was prepared by non-U.S. analysts employed by SMBC Nikko Securities Inc., an unregistered broker-dealer located in Japan that is not a member of FINRA or SIPC. "SMBC NiKKO" refers to SMBC Nikko Securities, Inc., its affiliate SMBC Nikko Securities America, Inc. ("SI"), a registered U.S. broker-dealer and member firm of FINRA and SIPC, and their other affiliates, as applicable by law. To the extent a non-U.S. analyst(s) was involved in the preparation of this research report, whether in whole or in part, he or she is not registered/qualified as a research analyst with FINRA. Any such non-U.S. analyst may not be an associated person of SI and therefore may not be subject to FINRA Rule 2241 and 2242 restrictions on communications with a subject company, public appearances and trading securities held in a research analyst account. By acceptance of this report, each investor agrees that it will not distribute or provide this report to any other person. Any person in the US receiving this report, or any other US person, who would like to trade any of the securities discussed in this report should contact SI. SI accepts responsibility for the content of this report when distributed in the US or to US persons.
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The following table shows (1) the distribution of investment ratings for all SMBC NIKKO coverage universe stocks and (2) the proportions of stocks
Note: For the purposes of mandatory regulatory disclosures, 1-Outperform corresponds to a "buy" rating, 2-Neutral to a "hold" rating, and 3-Underperform to a "sell" rating. However, SMBC NIKKO investment ratings are assigned relative to an analyst or analyst team's sector coverage as defined below and are thus different from "buy", "hold", and "sell" ratings as defined by FINRA. "Others" refers to Not Rated, Rating Suspended, and Restricted stocks.
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OTHER IMPORTANT US DISCLOSURES
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Company Name
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