Just emerging from deflation, Nomura begins to warn of a slowdown in the Japanese economy!

Nomura Securities' research report indicates that the weak growth of the Japanese economy may prompt the Bank of Japan to delay its planned interest rate hike.

On Wednesday, March 19, the Bank of Japan maintained its interest rate at 0.5% in its latest rate decision, while emphasizing that the uncertainties facing the Japanese economy and prices remain high, with risks including developments in overseas economic activities. The Bank of Japan's view aligns with Nomura Securities' previous research report.

The Nomura Securities report pointed out that the Japanese economy is facing downward pressure, with weak economic performance and uncertainties surrounding U.S. trade policies. Although market expectations for a rate hike in May have warmed, Nomura Securities believes that the likelihood of a rate hike in July is greater, and in the short term, the yen may remain relatively weak, while upward pressure on Japanese government bond yields may ease until economic data significantly improves or inflation continues to exceed expectations.

After the Bank of Japan's interest rate decision was announced, the dollar continued to rise against the yen, with an increase of over 0.3%, currently reported at 149.79.

Weak Private Consumption and Slowing Corporate Capital Expenditure Plans

The Japanese economy is facing multiple challenges, and Nomura Securities expects Japan's real GDP growth rate for the fiscal year 2024 to be 0.7%, 0.9% for fiscal year 2025, and 0.7% for fiscal year 2026, which is a downward adjustment from previous forecasts of 0.8%, 1.0%, and 0.7%.

Nomura Securities pointed out that domestic economic activities in Japan, especially private consumption, may perform weakly during the January to March period, with the real consumption activity index (adjusted for travel income and expenditure) declining by 1.3% in January, reaching a three-year low .

Corporate capital expenditure plans for fiscal year 2025 are also below levels seen in recent years, raising concerns that economic activity in fiscal year 2025 may not meet expectations. Data shows that capital expenditure plans for fiscal year 2025 (including software investments but excluding land purchases) are expected to grow by 5.9% year-on-year, slightly lower than for fiscal year 2024. Nomura expects real capital expenditure for fiscal year 2025 to grow by 1.4% year-on-year, while the actual growth for fiscal year 2024 is 2.0%.

Despite the slowdown in capital expenditure growth, Nomura believes it is still too early to assert that corporate willingness to invest in capital expenditure has weakened, given the high starting point and reasonable profit forecasts In addition to the domestic economic slowdown, the uncertainty surrounding U.S. tariff policies has also posed risks to the Japanese economy. U.S. President Trump’s 25% tariffs on steel and aluminum imports from Japan and other countries and regions took effect on March 12. President Trump also indicated that he intends to announce and implement reciprocal tariffs and automobile tariffs as early as April 2. Continuing this approach could negatively impact the Japanese economy.

Cabinet Approval Rating Declines, Pension Policy Advancement Faces Challenges

The domestic political situation in Japan has also brought additional risks to the Japanese economy.

According to a poll released on March 10, the cabinet approval rating dropped significantly from 44% in February to 36% in March.

This significant decline is believed to be related to the government's ineffective advancement of key issues such as pension reform legislation.

The pension reform bill is one of the important issues currently facing the Japanese government. The bill involves reducing benefits from employee pension insurance plans while increasing benefits from the national pension, as well as expanding the eligibility for employee pension insurance plans. However, due to the potential dissatisfaction it may cause among voters, the Liberal Democratic Party has been reluctant to submit the pension reform bill.

Surveys indicate that more respondents want the Prime Minister to prioritize pension issues. Nomura Securities pointed out that if the bill fails to pass in the current parliamentary session, it could further undermine public confidence in the government.

Additionally, the Japanese government faces numerous challenges in the deliberation process of the fiscal year 2025 budget. Although the House of Representatives passed the initial budget for fiscal year 2025 on March 4, the final approval timeline for the budget remains uncertain due to the decline in cabinet approval ratings and the stalled progress of several key bills. Nomura Securities expects that the Senate may pass the revised budget draft on March 28, but whether it can receive final approval from the House of Representatives by the end of March remains unknown