Commentary / Japan

2019: Reasons to be bullish or bearish

by Heizo Takenaka

It was in September 2008 that the collapse of Lehman Brothers triggered an economic shock leading to a global recession. Since then, most countries have gradually recovered, and in recent years what came to be called a Great Moderation permeated the world’s economies.

That market situation changed in 2018. Stock markets — which represent the current state and future of an economy — began to exhibit greater volatility. The volatility index of the Nikkei average on the Tokyo Stock Exchange has increased to nearly 25 from around 15 in mid-2017. A symbolic move of this volatility was the 4 to 6 percent plunge in share prices on the world’s major stock exchanges in just one day from Oct. 10 to 11.

Which brings us to the question of what will be the state of the world economy as we head into 2019. Will the world and Japanese economies keep up a moderate recovery, or will they turn downward? In Japan, the consumption tax is scheduled to be raised in October. How the economy will weather the hike will be closely watched given that it went downhill when the consumption tax was last increased in 2014.

Let’s take a look at the forecasts currently available. The International Monetary Fund has a scenario in which the global economy will go through a slight slowdown, estimating growth of 3.7 percent for 2019. Earlier, the IMF had forecast that growth would accelerate to 3.9 percent next year.

As for the United States, the IMF maintains that its economy will slow down a bit but keep up healthy growth, anticipating a 2.5 percent expansion in 2019 compared with the 2.7 percent growth estimate for this year.

What is the Japanese government’s take? It estimates 0.8 percent growth in fiscal 2018 (through next March) and forecasts 1.3 percent growth in fiscal 2019. The weak growth in the current fiscal year is attributed to the series of major disasters that hit the country, including a powerful typhoon and downpours in western Japan, that caused a dip in industrial output. On the other hand, a 1.3 percent growth forecast for fiscal 2019 seems to be a fairly bullish take on the economy — when the economy’s potential growth rate is deemed to be just shy of 1 percent and as it faces the consumption tax hike.

These forecasts are based on precise statistical analyses, and there are grounds for being either bullish or bearish about the economy’s prospect. To me, the following two points seem quite important as we weigh the prospects of the economy.

The first is whether the U.S. economy — a driver of global growth — will maintain its positive outlook. Economists who put greater emphasis on real economy indexes such as investments and consumer spending generally tend to be more bullish. An analyst who focuses on industrial sectors says there are no potential risks to the American economy.

Another bullish factor is said to be that President Donald Trump will mobilize all policy tools to boost the economy in 2019 to ensure his re-election the following year. Trump is widely criticized for his protectionist policies, but he also gets credit as a president who has steadily implemented his campaign promises.

Indeed, Trump has carried out the policies he promised — whether good or bad — ranging from tax cuts to withdrawing from the Trans-Pacific Partnership and placing trade sanctions on China. A theory gaining ground recently goes that the president’s blatant meddling in monetary policy will ultimately put a stop to monetary tightening.

The Trump administration’s posture of fully mobilizing fiscal and monetary policy is making the bullish economists more confident.

Those who take a bearish view on the economy focus on financial factors. They think the stock market volatility — as a leading indicator of the economy — symbolizes that. In fact, the rising U.S. interest rates along with America’s fiscal expansion are causing currencies to tumble and inflation to rise in emerging economies. They anticipate that monetary tightening by these countries will negatively affect the global economy.

The second point concerns the Japanese economy. Those who are bullish on its prospects basically think so because of the strong U.S. economy, but they also believe the impact of the consumption tax hike will be negligible. The increase from 8 percent to 10 percent will transfer ¥5.8 trillion from the private sector to government coffers. That would push down the nation’s GDP by more than 1 percent — a fairly big impact.

But the government intends to take some steps to mitigate the effects of the increase. Keeping the tax rate on daily necessities such as food and beverages at 8 percent will lighten the burden by ¥1 trillion. Half of the remaining revenue from the hike will be spent on policy programs such as free education for preschool children. And the other half will be offset by such measures as the offer of shopping vouchers with enhanced purchasing power and housing-related tax cuts. As a result, the net burden from the consumption tax hike on the private sector will almost disappear.

Others take a more bearish view — that the rush of demand ahead of the consumption tax hike in October and subsequent plunge in demand will still create large gaps in total demand before and after the increase, thereby causing the economy to go downhill.

In Japan, the lack of reduced tax rates on expensive purchases such as cars and houses resulted in a huge rush of demand ahead of the last hike in April 2014 — and an acute slump in demand afterward. The risk of such ups and downs should not be dismissed for the increase coming in October.

We will soon be heading into 2019. People hope that the economy’s upward trend will continue. However, the moderate and stable recovery that we’ve enjoyed over the past several years — either in Japan or in the world economy — should no longer be taken for granted. Japan assumes the chair of Group of 20 in 2019. The government needs to steer an in-depth discussion as to how countries should behave in order to aim for stable growth of the global economy.

Heizo Takenaka, a professor emeritus at Keio University, served as economic and fiscal policy minister in the Cabinet of Prime Minister Junichiro Koizumi from 2001 to 2005. He is a member of the government’s Industrial Competitiveness Council.