Japan: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Growth would not be able to take off in 2016
Growth remained subdued in 2015, driven by foreign trade and public consumption. In the first quarter of 2016, growth in the economy has been resilient, but the Abenomics have not given the expected results: the deflation risk persists and the public debt is still very high. All in all, growth prospects remain limited this year.
Although private consumption should sustain activity thanks to a slight upturn in wages (+2.2% after the negotiations in the spring of 2015, the largest increase in 17 years) and the emergency plan announced in November which provides minimum wage increase of 3% and stimulus measures (extension of access to unemployment insurance, aid to pensioners). Nevertheless, the dynamics should remain subdued, as evidenced the Prime Minister’s decision to postpone, for the second time, the hike in VAT rate from 8% to 10%, to October 2019 (initially scheduled for October 2015 then April 2017). The unemployment rate should stay low around 3%, wage growth could still be held back by companies’ tendency to not redistribute their profits to a sufficient extent, as well as the rigid structure of the Japanese labor market (low mobility and pronounced duality). Private investment is not expected to pick up significantly in 2016, dampened by companies’ wait-and-see behavior given the uncertainties weighing on the global recovery as well as the pressure on the yen’s appreciation. However it is likely to be stimulated by the tax cuts, the good financial conditions and the progress in terms of governance.
Inflation would struggle to remain positive in 2016, despite oil price is no longer falling (the drop in the price curbed the rise in inflation in 2015, but inflation excluding food and energy is struggling to stay in positive territory) It will in all likelihood stay far below the central bank’s 2% target.
A Chinese hard landing and a failure of wages to rebound are the main downward risks to growth. Beyond the current asset purchase program (JPY 80,000 billion per year), the central bank introduced a negative interest rate at 0.1%, in January 2016. Nonetheless, even if a new drop cannot be ruled out this year, the positive impact of this monetary easing would be moderate given the massive liquidity that has already been provided.
Consolidating public finances remains a crucial challenge
The fiscal deficit will probably stabilize at a high level in 2016. The increase in welfare spending (healthcare) weighs heavily on the State budget while revenues are insufficient. However the government has decided to postpone the new rise of the VAT rate to 2019 and to continue the corporate tax reform (tax cut and broadening of the tax base). Following the earthquake in Kyushu, in April 2016, 780 billion of yen would be added to the budget to help with the rebuilding (though the government reports a neutral budgetary cost with compensation via debt service reduction) Furthermore, a stimulus plan is scheduled and could amount between JPY 5,000 billion to JPY 10,000 billion. Fiscal consolidation remains a key challenge for the country, and although the government reasserted its determination to reach a primary surplus by 2020, greater efforts will be required to reach this objective.
The current-account surplus should be maintained in 2016 owing to a trade deficit, still limited, by the reduced energy bill. Nevertheless the exports could be affected by the appreciation of the yen against the dollar at the beginning of the year. Related in particular with this appreciation, Toyota anticipates a 35% net profit fall, for the fiscal year 2016/2017. The services balance should improve under the effect of an increase in tourism (because of the easing of rules on granting visas in Asia), with FDI remaining stable on the whole.
Shinzo Abe was re-elected, but his popularity is declining
In September 2015, Shinzo Abe was re-appointed as head of the LDP (the Liberal Democratic Party currently in power). The opposition’ role remains weak. Senate elections are scheduled for July 2016. In the event of a victory, Shinzo Abe could remain in power until 2018. Nevertheless, the lack of results of Abenomics and the earthquake in Kyushu could once again reduce his popularity rating. In July 2016, half the seats in the House of Councillors will be renewed. This vote will therefore represent a test for the ruling party.
Concerning the business environment, the authorities announced a simplification of procedures to encourage SMEs to invest in the emergency plan in November. Moreover, an agreement in principle was concluded in October 2015, concerning the Trans-Pacific Partnership for free trade (12 countries involved). The challenge is to harmonize standards by reducing customs tariffs and to counterbalance China’s growing influence.