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ECONOMICS | PREDICTIONS

February 2014

Japan’s 10 Surprises 

Non-market forces could bring real change here

By Jesper Koll

As the new year moved into its second month, we had all built our base-case scenario for what we expected to happen during the year.

According to consensus, Japan’s economy is expected to potter along, growing around 1.5 percent during 2014–15.

However, a more interesting exercise is to think about non-market forces that could surprise and bring about a change in Japan’s overall fortunes.

Below are my proposed possible surprises for 2014–15.

  • A global Fortune 500 company relocates its Asia headquarters to Tokyo.

Team Abenomics claims their policies are all about making Tokyo the best and most competitive city in which to do business.
Possible? If the Special Economic Zones deliver, absolutely.
Further, bad pollution and increasingly restrictive business practices in other Asian cities may help the cause.

  • Japan’s youth embraces a new fashion for marriage and childbearing; the 2014–15 baby boom forces a significant increase in the birthrate.

Possible? Absolutely. Leading indicator: restaurant and hotel reservations for Valentines Day have never been more difficult to secure . . .

  • The consumption tax hike comes and goes with almost no negative impact on domestic demand, even in the April–June period.

This is a big worry on everyone’s mind. However, if—as I suspect—wages and employment continue to accelerate, the tax hike is bound to be little more than an air pocket during an essentially stable uplift.

  • Industry by industry, Japan creates true national champions with an unprecedented domestic merger wave.

Excess competition and too many local players have been a longstanding structural impediment to Japan Inc. Prime Minister Shinzo Abe and bureaucrats from the Ministry of Economy, Trade and Industry and the Ministry of Finance (MOF) are in favor, so it’s difficult to see what will stop this from happening—the Japan Fair Trade Commission?

  • Inflation exceeds 2 percent by midyear, keeps rising, and by yearend the Bank of Japan Policy Board forecasts 3.1 percent inflation for 2015, well above its 2-percent target.

Inflation in Japan? Why not? All businesses are feeling the cost-push price pressure from the weaker yen, higher commodity prices, and rising energy costs.
Add to this the increasingly tight labor market and, before long, you end up with real price-power shifts. I believe the risk of inflation is real.

  • Japan starts building its own aircraft carrier.

Security and defense are an area of growing uncertainty. Let’s hope cool heads and rational strategies persist.

  • Abe introduces all-out means testing for national pensions and healthcare, cutting benefits for the rich baby boomers.

All advanced industrial economies need to think about this. I believe Japan could well become a world leader in implementing true entitlement cuts.

  • The budget deficit halves and, by yearend, MOF officials start forecasting a possible budget surplus by 2015–16.

Tax revenues could be a big positive surprise with corporate profits more than doubling, incomes rising, and the consumption tax increasing from April.
However MOF is unlikely to want to project a surplus, as the government must secure political approval to raise the consumption tax to 10 percent in October 2015.

  • A Japanese financial institution buys into, or merges with, a major global or investment bank.

Money talks, and if Japan really does get back its animal instincts, a more aggressive policy of global expansion would make sense.

  • Japan loses to Germany in the 2014 FIFA World Cup final.

Call me biased—I am German, after all—but when the World Cup comes around, I abandon all reason and know instinctively which team should win.

Germany winning is always a real possibility, but Japan even making the final, well, that would be a real surprise. Gambatte Nippon!

Jesper

DividerJesper Koll is a managing director and head of research at J.P. Morgan Securities LLC.

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