Our comprehensive assessment of Japan's operating environment and the outlook for its leading sectors are formed by bringing together a wealth of data on global markets that affect Japan, as well as the latest industry developments that could impact Japan's industries. This unique integrated approach has given us an impeccable track-record for predicting important shifts in the markets, ensuring you’re aware of the latest market opportunities and risks in Japan before your competitors.
Japan Country Risk
There are few good options available to the Japanese government to address its ballooning debt load, but we believe that debt monetisation could prove to be the most costly in terms of its medium-term economic impact. The government could find itself facing high inflation, stagnating economic activity, and rising pressure on bond yields if current policies persist. We maintain our bearish view on local assets given these growing risks.
Japan's Q413 GDP release does not make for optimistic reading. While real GDP came in at 1.0% q-o-q seasonally adjusted annualised, it marked the third consecutive quarter in which growth has slowed, showing the diminishing marginal returns of the ongoing monetary and fiscal stimulus measures. From a full-year 2013 growth rate of 2.7%, we expect to see a drop to 1.3% in 2014, which compares with consensus expectations of 1.5%. Even...
Japan Industry Coverage (21)
BMI View: Despite the government's acknowledgement that the country's agricultural sector is in need of reform and transformation, we believe that the piecemeal policies adopted and the lack of compromise in international free trade talks points to the gap between rhetoric and action. Indeed, Japan's uncompromising stance in maintaining tariffs on imported rice, wheat, beef, pork, dairy and sugar - the country's sacred farm products list - might prove costly in the long run. With an ageing farmer population (the average age of a Japanese farmer is close to 70 years old) coupled with highly inefficient farming methods - usually constrained by the small plots of family run farms - the Japanese agriculture industry faces a bleak future if it does not reinvent itself. There are however, green shoots in the midst of this, as illustrated by the rise of more public-private joint ventures in the agriculture space such as the new subsidiary of Sojitz...
We reiterate our pessimistic outlook for Japan's domestic auto sales, as the sales tax hike (from 5.0% to 8.0%) in April resulted in auto sales growth being negatively impacted, prompting us to downgrade our 2014 overall vehicle sales forecast to 2.9% from 3.6% previously. In August, Japan saw the largest decline in auto sales since 2011, as the Japan Automobile Manufacturers Association (JAMA) announced thatÂ auto sales tumbled 9.1% year-on-year (y-o-y) to 333,471 units. The slowdown appears to be broad based, as passenger car sales and commercial vehicles (CVs) declined 9.5% y-o-y and 7.1% y-o-y respectively in August.
For the first eightÂ months of 2014, passenger car sales grew 7.1% y-o-y, largely driven by the sales surge between January and March, where consumers rushed to make purchases before the sales tax hike in April. While mini car sales growth has remained robust in 2014, and has generally outperformed the passenger car segment...
Defence & Security
Japan Defence & Security
BMI View: Â 2014 has witnessed defence policy changes which carry significant implications from the national defence sector, and Japan's role in regional and international security. Notable, constitutional changes have edged Japan towards military normalisation, paving the way for a more active role in regional security. Meanwhile, the domestic defence industry is now permitted to export technology and is being actively encouraged to engage in international joint ventures, yielding fresh opportunities for the international defence market. In line with this increasingly assertive military policy, the Ministry of Defence has requested a record 3.5% budget increase, which will be used to fund major new acquisitions in maritime and air security.
After a decade of cuts to defence expenditure, Japan is seeking a third increase in its annual defence budget. The Ministry of...
Food & Drink
Japan Food & Drink
BMI's outlook for Japan's food and drink industry remains subdued as the stagnant economy continues to limit the industry's growth potential. Consumption tax hikes will further weaken the purchasing power of the Japanese consumer, while the absence of structural reforms and unfavourable demographic trends will weigh on the economy over the longer term.
Prime Minister Shinzo Abe's combination of ultra-loose monetary policy and higher public spending bolstered economic growth in 2013. As one of the measures to increase its revenues, the government is considering gradually raising the consumption sales tax - from 5% to 10% - by 2015. This will put additional pressure on consumer spending power. Â
Headline Industry Data (local currency)
Per capita food consumption (local currency) growth (y-o-y) in 2014: +0.25%; CAGR to 2018: +0.4%....
Japan Freight Transport
Japan's economy contracted more than expected in Q214, according to revised data released on September 8. The country's GDP decreased 1.8% quarter-on-quarter in the reported period, more than the earlier estimated decline of 1.7%, according to the Cabinet Office.Â The contraction in GDP has raised pressure on the government to postpone another rise in sales tax. It has also put pressure on the central bank to expand its stimulus. The revised data showed that the country's GDP contracted an annualised 7.1% in April to June, compared with a 6.8% decline in the preliminary figures.
The result was primarily driven by the negative impact of a hike in sales tax in April, which was introduced to generate revenue and cut the country's huge national debt. 'Expectations will likely strengthen for further monetary easing by the Bank of Japan and more spending by the government,'Â said Junichi Makino, chief economist at SMBC Nikko...
BMI View: The rapid decline in construction and infrastructure growth in Japan is a sign that the government's aggressive stimulus measures have already begun to wear off. This once again underscores our long-held view that Japan's fiscal stimulus programme is not a sustainable path forward for either the infrastructure sector or the broader economy, and that significant structural reforms are needed to restore competitiveness. Following an estimated 3.3% rate of real growth in 2014, we expect the construction industry's expansion to slow to 2.3% in 2015.
Key Trends And Developments
In October 2014, Mott MacDonaldÂ announced that it will supervise the construction of the USD1.1bn solar photovoltaic (PV) Kuni-Umi plant near the city of Setouchi, Okayama, Japan. Mott MacDonald also acted as the client's engineer during the...
BMI View: Both the life and non-life segments in Japan's insurance market are very well developed, with high rates of penetration (market premiums as a percentage of GDP), particularly in terms of life products. The country also has one of the largest non life markets, in terms of gross premiums, in the world and we expect to see growth across a range of insurance products during the forecast period, despite intense competition in the market .
Japan's non-life segment is very much dominated by motor vehicle insurance, which accounts for around 55% of the country's total non-life insurance. Japan requires compulsory automobile liability insurance (CALI) based on the type of vehicle and subject to a gross rate tariff, which accounts for the dominance of motor insurance in the market - though it is worth noting that voluntary premiums have seen...
Japan Medical Devices
Espicom Industry View: The Japanese medical device market remains the second largest in the world, behind only the USA. The medical device market has continued to exhi bit a slow but positive growth in local currency terms in recent years, with under half of the market supplied by imports. Â The market looks set to expand by a CAGR of 2.9% in US dollar terms to 2018.
Headline Industry Forecasts
The Japanese medical device market remains the second largest in the world, behind only the USA.Â In US dollar terms, the market is projected to expand by a CAGR of 2.9%, which should see it rise from an estimated US$30,160.5mn in 2013 to US$34,854.8mn in 2018. Due to exchange rate differences, the market...
BMI View : Weak economic growth will lead Japan's metal s industry to see minimal Â growth to 2018 . Â The country's Â construction and infrastructure industries will see declining growth by late-2015 after recent expansion, while automotive production will be modest over the coming years. Yet a weaker yen is likely to encourage exports, supporting stable production levels.
Japanese refined metal production and consumption will see minimal growth in the coming years on account of weakening economic fundamentals. Our outlook for Japanese...
BMI View : Japan 's mining sector will experience modest growth ove r the coming years due to the lack of mineral wealth and the downturn in commodity prices. We forecast the country's mining industry value to reach USD4.0bn by 2018, growing at a modest clip of 1.4% per annum.
The lack of non-ferrous and precious metal reserves will continue to stifle capital flows into the domestic mining sector. While rich deposits of rare earths have been discovered on the seabed, we believe the development of these resources is unlikely to take place over our forecast period to 2018. Low rare earth prices by historical standards and rising environmental concerns suggest that the path towards seabed mining will not be smooth sailing.
|Little Potential In Sight|
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Oil & Gas
Japan Oil & Gas
BMI View: Â N ew legislation intended to streamline the refining sector saw around 400,000 barrels per day ( b/d ) of Japan's refining capacity taken offline. We forecast Â weak refined product demand to offer limited future prospects for the sector. We forecast the first nuclear power plants to return to the Japanese grid before the end of 2014, reducing the need for fossil fuel imports. The mild summer has also tempered LNG demand and softened import costs. That said, we expect liquefied natural gas...
Japan's petrochemicals industry will slowly turn the corner in 2014, following a period of volatility and decline. However, BMI's Japan Petrochemicals Report warns that the industry cannot count on domestic demand for growth, while in external markets it struggles with competitiveness in the context of high naphtha import costs and the expected onslaught of cheap product from North America.
Ethylene production has slowed markedly with output levels now at levels not seen for 20 years. Producer margins have been squeezed with the major players reporting much lower profits for the latest financial year. Japanese polymer demand has languished, although producers have been able to pass on higher naphtha costs by hiking product prices, thereby protecting margins. Fibre intermediates, such as purified terephthalic acid (PTA), acrylonitrile (ACN) and caprolactam have been hard hit as have products further downstream such as...
Pharmaceuticals & Healthcare
Japan Pharmaceuticals & Healthcare
BMI View: Â The Japanese pharmaceutical market continues to hold strong rewards for innovative pharmaceutical companies. This is driven by the country's rapidly ageing population, preference for branded medicines and strong public coverage of drug expenditure. However, the cost containment measures by the government including aggressively cutting medicine prices pose a downward risk to the market's long term growth.
Japan's Pharmaceutical Risk/Reward Index (RRI) score for Q115 increased to 78.1 out of the maximum 100 in our newly improved RRR system. This high score makes Japan the most attractive country in comparison with the other 18 key Asia Pacific markets, followed byÂ South Korea (68.6) andÂ Australia (67.0). Japan's score is boosted by the large multi-billion dollar drug market (market expenditure score of 18.0 out of 20...
BMI View: Japan will ultimately restart 40-50% of its nuclear reactors so as to reduce the cost of fuel imports, which have been exacerbated by the weak yen and pushed Japan to register a record trade deficit in 2013 . We anticipate LNG imports will remain elevated - as gas-fired generation fills the void left by nuclear facilities that are closed permanently. Coal has also been championed by the government in i ts April 2014 Basic Energy Plan a nd looks set to play a role as an important source of baseload capacity.
At the time of writing all 50 of Japan's nuclear reactors are offline. This gaping hole in Japan's electricity generation is being filled by thermal sources (oil, natural gas and coal) and this...
Japan Real Estate
BMI View: Â Global interest in Japan ' s commercial real estate sector continues to grow with the country fast becoming one of the most sought after locations for real estate investors. 2014 is shaping up to be a more conservative year for the industry as slower economic growth leads to a more conservative business environment.
With a focus on the three principal cities of Tokyo, Yokohama and Osaka, the Q4Â 2014 Japan Real Estate report covers the property fundamentals of the commercial real estate market rental market and examines the office, retail, industrial and construction segments throughout the country.
A weakening retail market and a slowing economy are the main concerns for Japan's commercial real estate sector over the coming months with the introduction of a new sales tax creating a further...
BMI View : Â We are maintaining our 2015 forecasts for non-hydropower renewable energy generation and capacity in Japan this quarter. Our long-term forecasts for the sector remain stable as well, although we highlight that a potential change in regulations in April 2015 poses a downside risk.
We have maintained our 2015 forecasts for non-hydropower renewable energy generation and capacity in Japan this quarter. For 2015, we expect around 5.6GW of new renewable energy capacity to come online, with the majority (around 5.3GW) being solar capacity.Â We have maintained our long-term forecasts for non-hydropower renewable energy this quarter. We expect capacity to grow an average of 10.0% a year between 2015 and 2023, with the majority of growth coming from solar and wind capacity.
Key Trends And Regulatory...
Japan posted a 6.8% fall in GDP in Q2 2014, according to a preliminary reading by the Cabinet Office on August 6 (RTT News). The figure, which is down from a revised 6.1% increase in Q1 2014, beats expectations of a contraction of 7.1% for the second quarter. Japan's GDP fell 1.7% quarter-on-quarter in the reported period, beating forecasts for a fall of 1.8%. The figure is down from a revised 1.5% gain in the January-March period.
The Bank of Japan's policy of trying to generate inflation to spur economic growth continues to backfire, with inflationary pressures building while the economy weakens. This is unlikely to deter them from implementing more monetary stimulus, to the detriment of capital formation, economic growth, and financial stability.
In terms of the shipping picture in Japan, this year will see the Port of Kobe leading the way in annual tonnage throughput growth, but this will be an uninspiring 2.20% and...
BMI View : Japan's telecommunications market is saturated , with above 100% mobile penetration and close to 94% of the mobile subscriptions on 3G or 4G services in 2013. The main driver of the saturated market is expected to be in the 4G and big data services, both of which are crucial to operators to help offset the loss of voice and SMS revenues to free messaging service LINE. According to data provided by the regulator the Ministry of Internal Affairs and Communications (MIC), LTE subscriptions grew at 119% in 2013, while 3G subscriptions show modest decline of 2.4% over the same period , s howing strong eviden ce...
BMI View: Â With one of the most highly developed transport networks in the world and an active hotel and acco mmodation sector, Japan is well- placed to take advantage of the growth we expect to see in terms of inbound arrivals to the country. At the same time, domestic economic growth is lending strength to the outbound travel market, and while growth will be more subdued the potential market remains substantial.
More than three years after the earthquake and tsunami that caused widespread damage to a 400km stretch of coastline, resulting in nearly 19,000 deaths and the destruction or damage of a million buildings, Japan's reconstruction efforts are ongoing. Over 200,000 people remain displaced, and much of the affected region's infrastructure remains in bad condition. The earthquake and tsunami had a substantial impact on...
BMI View: Â This quarter has seen the expansion of our water forecasts and the revision of our existing forecasts following the release of new historical data. In addition , we now forecast mains and non mains water extraction by source, household and non mains water consumption, and water losses. We view the overall state of the Japanese water sector as relatively strong, with good water availability for industrial usage. However, in the wake of the continued controversy surrounding the Fukushima leakages, which have not only contaminated Japan's ground water but are also affecting the Pacific Ocean, we expect to see more stringent industrial water consumption and water treatment legislation. Japan has a good track record for enforcing stricter water sector legislation when needed.Â