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21 December 2016

Economic Report

Outlook for the Japanese Economy in Fiscal 2016 and Fiscal 2017 (as of November 2016)

— Amid the Risk of a Possible Downturn, the Economy Is Showing Moderate Improvement —

1. Current State of the Economy: The Economy Is Moving Away from Fluctuations within a Narrow Range

The real GDP growth rate for the July-September period of 2016, which was announced on November 14, was

+0.5% (2.2% at an annualized rate), the third consecutive quarter of expansion. This result shows again that the

economy is escaping from movements within a narrow range. However, a closer look at the figures shows that

this expansion was driven by the external sector, and growth in domestic demand was relatively slow and lacking

in recovery momentum.

Personal consumption rose by a small margin of 0.1% over the previous quarter, thus continuing the same pace

of expansion of 0.1% in the April-June quarter. The personal consumption deflator decreased 0.2% from the

previous quarter, thus giving a boost to the figure for real consumption. In nominal terms, consumption declined

0.1% for the April-June quarter, the second consecutive quarterly decrease. On the other hand, worker

compensation in real terms rose 0.7% for the quarter, the ninth consecutive quarter-to-quarter rise, but this did not

give rise to an increase in consumption expenditures. (Compared with the same quarter of the previous year,

consumption expenditures were up 3.0%.) Despite the positive factors of ongoing improvement in the

employment and income environments, consumers continued to hold tight to their purse strings because of

factors that included unseasonable summer weather and weakness in consumer confidence due to continued

frugality among consumers and declines in stock market prices.

Private residential investment showed firm growth of 2.3% over the previous quarter in the July-September

period, despite recent declines in the level of new housing starts, which are a leading indicator for residential

investment, because of steady increases in this indicator through the April-June quarter.

In the corporate sector, capital investment was level with the previous quarter, thus continuing to fluctuate within a

narrow range. It appears that investment is holding steady, sustained by demand for the maintenance and

replacement of facilities. However, in the midst of deterioration in corporate performance, mainly in the

manufacturing sector, corporations are thought likely to remain cautious about any major increases in capital

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investment in Japan.

The contribution of inventory investment to real GDP was –0.1 percentage point. As corporations are still making

inventory adjustments, this is contributing to downward pressure on the real rate of growth.

As a result of these factors, the contribution of the private sector as a whole was level with the previous quarter,

weaker than the +0.3 percentage point contribution in April-June quarter. On the other hand, the contribution of

the public sector was also level with the previous quarter. Demand for government services, including medical

treatment, is on an upward trend, and final demand for government consumption expenditures began to rise

during the quarter, in reaction to the decline of 0.3% in the previous quarter. However, the upward boost provided

by the government’s supplementary budget for fiscal 2015 has run its course, and public investment decreased

0.7% for the quarter, the first decline in three quarters. For this reason, public-sector demand did not fully cover

the weakness in private-sector demand.

Domestic demand, including the private and public sectors, contributed a small 0.1 percentage point to GDP

growth for the quarter, but the contribution of the external sector was a relatively high 0.5 percentage point, thus

boosting the overall economy. Factors accounting for the contribution of the external sector included the recovery

in automobile exports which were restrained by the supply constraints caused by the Kumamoto earthquakes,

and the improvement in demand overseas for semiconductors and other electronic components. These

developments resulted in the firm expansion of 2.0% in exports over the previous quarter. On the other hand,

reflecting the weakness in the improvement in the domestic economy, imports decreased 0.6% from the previous

quarter, which was the third consecutive quarterly decrease in imports.

The growth rate of nominal GDP was a slow +0.2% over the previous quarter (+0.8% at an annualized rate). In

addition, the GDP deflator, which reflects comprehensive price movements in the overall economy, stood at

–0.1% compared with the same quarter of the previous year, the first year-on-year decrease in 11 quarters, since

the October-December quarter of 2013. (After seasonal adjustment, the year-on-year decline in the

July-September quarter was –0.3%, the first year-on-year decrease in 13 quarters since the April-June quarter of

2013.) Factors accounting for this have been the shrinkage in the margin of decline in import prices

accompanying the bottoming out of crude oil prices and other natural resources and the wider margin of decline in

the domestic demand deflator, which moved from –0.7% in the April-June quarter, to –1.0% in the July-September

quarter. Downward pressures on prices have begun to grow stronger as domestic demand has continued to be

weak and the effects of the decline in import prices, owing to the appreciation of the yen, have moved through the

domestic economy.

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2. Trends to Watch: Will the Trump Presidency Be Positive for the Japanese Economy?

In the U.S. presidential election held on November 8, 2016, candidate Donald Trump won an unexpected victory.

Immediately thereafter, a wave of risk aversion swept the markets, stock prices tumbled and the yen appreciated.

Throughout his election campaign, Trump championed the position of “America First” and repeatedly made

extreme remarks. However, many doubted whether his remarks were really implementable, and it was unclear

what impact his policies would have on the economy. This led investors to become more risk averse, and,

temporarily funds flowed into safe assets.

However, on the day after the election, the markets in the United States were buoyed by Trump’s statements

regarding the promised major reduction in corporate taxes, deregulation, and expansion in infrastructure

investments, and these statements led to expectations of an improvement in performance of U.S. companies and

expansion in the U.S. economy. This, in turn, led to sharp uptrends in stock prices, a return to U.S. dollars, and a

drop in the value of the yen.

Since then, market expectations have held steady, and the stock markets have moved to historical highs on a

daily basis. Along with speculation about the deterioration of government finances and a trend toward avoiding

risk, bond holdings have been sold (leading to higher interest rates), and the dollar has appreciated. With these

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-1.0

0.0

1.0

2.0

3.0

13 14 15 16

Chart 1. Real GDP growth rate by demand(Quarterly)

Private Consumption Private Capital Investment Government ExpenditureInventory Investment Exports ImportsReal GDP Growth

Source: Cabinet Office "Quarterly Estimates of GDP"

(Qr/Qr, %)

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movements in financial markets as a background, the U.S. economy has held firm with the real GDP increasing at

2.9% at an annualized rate in the July-September period. In addition, the possibility of a tightening of monetary

policy at the December meeting of the Federal Open Market Committee (FOMC) is growing stronger.

If confidence in the future course of the U.S. economy continues at current levels, sales during the Christmas

season will be favorable, and there is a possibility that the economy will be boosted in the short term. However,

many of Trump’s public promises seem likely to be lacking in realism and attainability, when it comes to the

implementation stage after the beginning of 2017. Therefore, it remains uncertain how much he can actually

accomplish. Among these promises, there is a strong possibility that those regarding major tax cuts and

large-scale spending on the infrastructure will have to be revised.

In addition, as a result of the elections for the House of Representatives and Senate, which coincided with the

presidential election, the Republican Party has control of both houses of Congress, but the relationships between

Trump and the majority of groups in the Republican Party are not good. For this reason, the conflicts regarding

policy implementation between the new president and the Congress may become sharper, and, throughout

Trump’s term, there is a risk of policy stalemates.

Taking this into account, there is a possibility that the current rising hopes will wither, and there will be a risk that

financial markets will be thrown into turmoil once again over Trump’s statements, and this may lead to a trend

toward deceleration in the world economy if this situation is prolonged. Accordingly, at this stage, it would be

dangerous to hold strong expectations that the U.S. economy will continue to expand smoothly.

In the areas of trade policy and diplomacy, especially as regards revisions in relationships with countries in

Southeast Asia, it will take a certain length of time for it to become clear how many of Trump’s extreme

statements can reach the implementation stage. For this reason, in the short term, the main effects on Japan will

be mainly through fluctuations in the financial markets. However, taking a longer-term view, we can envision

many effects on Japan, depending on how the policies of the new president are put into action. In some cases,

there may be negative effects on the Japanese economy.

In the field of trade policy, Trump is expected to take a stronger protectionist stance. Putting the Trans-Pacific

Partnership (TPP) into effect will require signatures of both Japan and the United States in actual practice, but the

possibility that the United States will not sign the partnership agreement has increased now that Trump has been

elected, and putting TPP into effect may be difficult. Since Prime Minister Shinzo Abe has positioned the

conclusion of international collaborative agreements, such as TPP, as one of his growth policies. For this reason,

if TPP is not implemented, Abe may have to review his growth strategy. In fact, for example, agricultural reforms

in Japan assume the implementation of TPP, and, if TPP does not go into effect, there is a possibility that

progress toward agricultural reforms will be delayed. In addition, exports of industrial products from Japan will not

expand as much as have been expected thus far.

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In the diplomatic sphere, Trump has repeatedly said that the Japan-U.S. Security Treaty is unfair and that Japan

should share more of the burden of supporting the U.S. forces in Japan. Accordingly, Trump may ask Japan to

shoulder a more-appropriate share of the defense costs, and there is a possibility that this will bring a larger fiscal

burden for Japan and additions to Japan’s defense spending. In addition, if the United States takes a

more-isolationist stance, this may lead to a review and revision of the U.S. Asian strategy, and if the United States

recedes from taking a more-active engagement stance in Asia, there will be concerns about rising geopolitical risk

in the region.

Moreover, if the yen appreciates suddenly and if protectionism grows stronger in the United States, it will be

difficult to undertake major sales of yen. In this case, it is conceivable the pressures will grow for additional

monetary easing policies by the Bank of Japan (BOJ). If other effective means are not available, there is a

possibility that the BOJ will undertake additional monetary easing, and the profitability of financial institutions will

be impacted negatively by deeper incursions into negative interest rate territory.

3. Outlook for the Japanese Economy in Fiscal 2016 and Fiscal 2017 — Amid the Risk of a Possible Downturn, the Economy Will Show Moderate Improvement

Assumptions underlying this outlook include the following: The positive effects of the second supplementary

budget for fiscal 2016, which will be mainly public investments, will begin to emerge in the October-December

quarter of 2016. From fiscal 2017 onward, the government will not introduce any additional economic policies. In

addition, as at the time the consumption tax was raised to 8%, when households purchase homes, the

government will implement a special measure making the current tax rate applicable provided the construction

contract is signed six months prior to tax rate increase (in this case, by the end of March 2019). It is believed likely

that this measure will bring a surge in housing construction in the latter half of fiscal 2018. However, surges in

demand for other purchases are not expected during the forecast period.

Turning to the effects on the world economy of the inauguration of the newly elected President Trump, there are

many uncertain aspects regarding policy implementation. Accordingly, we have revised our outlook for financial

and commodity markets taking account of current developments and limited our analysis mainly to the likelihood

that the yen will decline in value and the implications of this trend. However, basically, we believe it will be difficult

for the current rising expectations to continue for a prolonged period, and we are not looking for the U.S. economy

to remain on a steadily rising trend under the new president. Instead, Trump’s extreme statements may bring

turmoil to financial markets again, and there may be periods when the risk of a downturn in the world economy

may rise.

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In fiscal 2016, from the October-December quarter onward also, Japan’s real GDP is expected to remain on a

positive rising trend. The economy will move away from fluctuations within a narrow range and will probably move

to a rising trend. Improvement in employment and incomes and declining prices will be positive factors for

households. In addition, since the effects of unseasonable weather will wear off, consumer spending is expected

to begin to show a firm trend again. Moreover, along with the recovery in the world economy, exports will increase

gradually, and the positive effects of the implementation of the supplementary budget for fiscal 2016 will begin to

provide a stronger boost for the economy moving toward the end of fiscal 2016. Positive real growth in GDP for

the fiscal year is forecast to continue, with expansion of 1.1% over the previous year.

Note that the absence of a clear driving force in the economy will continue. For this reason, although real growth

will remain positive, it is unlikely that the margin of growth will expand, and a moderate rising trend is expected to

continue during the forecast period .

Turning to the world economy in fiscal 2016, the U.S. economy remains on a recovery trend and showed real

GDP growth of 2.9% at an annualized rate (preliminary figure) in the July-September quarter, which was the

second consecutive quarter-to-quarter increase. Although the momentum of consumer spending has weakened

somewhat, given the recent rising trend in stock prices and other factors, consumption is expected to show

improvement as the Christmas selling season approaches. In addition, the employment situation is improving

steadily. In view of these trends, it seems likely that the FOMC will begin to tighten monetary conditions in

December. Moreover, in the Eurozone, moderate economic expansion is expected to continue, and, even in

China, the outlook is for the economy to show an improving trend because of the positive effects of economic

policies. In addition, the currencies of the newly emerging and resource-producing countries are strengthening,

and, since turmoil in international financial markets is generally subsiding, prices of crude oil and other natural

resources, which were at a low point previously, are beginning to show improvement. Moreover, the turmoil

arising in international markets as a result of the decision of the United Kingdom to leave the EU is subsiding

because of judgments that the effects of the U.K. move will be short-term and minor. Accordingly the U.K.

departure from the EU is expected to have only a marginal impact on the world economy.

In view of these developments, concerns about deceleration in the world economy, which were mounting

temporarily, are receding. Therefore, as we approach the fiscal year-end, recovery trends in the world economy

are expected to gradually grow firmer.

Nonetheless, the factors that boosted exports in the July-September quarter, namely, the increase due to the

comeback in automobile production and exports of smartphone-related materials, are expected to run their

course, and it is unlikely that the momentum of exports will increase. On the other hand, factors that may slow the

world economy and rekindle turmoil in financial markets, such as the implementation of interest rate increases in

the United States and the diminishing expectations regarding the policies of soon-to-be President Trump, are

causes for concern about deterioration in the export environment.

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In the household sector, the supply and demand balance for labor is expected to continue to be tight in the

corporate sector, reflecting the rising shortage of labor. However, per capital wages are forecast to show only

moderate increases because of the deterioration in corporate performance, the shrinkage in the margin of wage

increases resulting from the spring wage offensive, the increase in non-regular workers in the workforce, and the

rise in the number of workers in lower-wage jobs. As a consequence, the rate of increase in wages in the latter

half of the fiscal year is also expected to be moderate. Despite this, real household incomes are forecast to rise

steadily because of the increase in the number of workers employed, which will boost household incomes, and

the decline in prices.. During fiscal 2016, the decline in import prices due to the appreciation of the yen, the

diminishing of the boosting effect of increases in food prices, and the decline in the price of energy on a

year-on-year basis are expected to bring year-on-year declines in the consumer price index (CPI) (excluding

fresh food, comprehensive). In addition, the recovery in the world economy and stability in financial markets are

expected to bring moderate recovery in consumer confidence and a gradual decline in the tendency toward

frugality among consumers.

In the corporate sector, the deterioration in performance is expected to be moderate. The appreciation of the yen,

which had an adverse impact on performance of exporting companies in the first half of the fiscal year, has

paused, and, provided the yen depreciates to the level of ¥105 to the U.S. dollar or higher toward the end of fiscal

year, the performance of exporting companies in the second half of the fiscal year is expected to improve

substantially. In addition, although the prices of crude oil and other natural resources have bottomed out,

increases in these prices are expected to be gradual, and the rise in the cost burden on corporations will be

relatively small. Another factor supporting corporate performance will be the continuing positive impact of

restructuring efforts thus far, which have given corporations a high profitability business position.

Nevertheless, a sudden improvement in the drive to invest among corporations is deemed to be unlikely. Although

corporations have ample cash positions, they are expected to maintain their cautious stance toward investment in

Japan and to keep capital investment approximately level with the previous year, focusing on investments in the

maintenance and replacement of the existing stock. Overall corporate capital investment in 2016 is expected to

be at about the same level as in the previous fiscal year. Note that, as a result of the introduction of negative

interest rates, interest rates on loans have declined, but the level of interest rates is already sufficiently low, and

we cannot expect a rise in demand for funds from the corporate sector.

Regarding public investment, as the positive impact of the supplementary budget for fiscal 2015 diminishes, the

boosting effect of the second supplementary budget will gradually increase. Accordingly, the pace of public

investment spending is expected to rise again near the end of the fiscal year.

The principal risk factor for the economy in the latter half of fiscal 2016 will be the resumption of the downturn in

overseas economies, which are currently showing improvement, because of turmoil and other circumstances in

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financial markets. In particularly, we cannot deny that extreme statements by President-elect Trump may

suddenly completely change the mood in financial markets. If the emerging markets, principally China, and the

resource-producing countries experience increasingly severe slowdowns in their economies and Japan’s exports

trend downward, there will be a growing risk that the Japanese economy may fluctuate within a narrow range for a

prolonged period.

Note that, after the exclusion of the carryover effect of +0.3%, growth during the fiscal year as a whole is forecast

to be +0.8%. The economy will fluctuate within a narrow range, and, after the exclusion of the carryover effect

growth, the movements in the economy will clearly differ from those in fiscal 2015 when growth was a small

negative figure .

In fiscal 2017, a moderate trend toward economic recovery is expected to continue, and the outlook is for real

GDP growth of +0.9%, which will be the third consecutive year of positive growth. Consumer spending will show

moderate improvement, as employment and income conditions continue to improve. In addition, along with the

improvement in corporate performance, capital investment will shift to a moderate rising trend and provide

support for the economy. Similarly, the positive effects of the second supplementary budget for fiscal 2016 will

begin to emerge in earnest, mainly in the first half, and provide a boost for the economy. Also, since the recovery

in overseas economies will continue, the outlook is for the continuation of export growth. After the exclusion of a

carryover effect of +0.3%, the rate of real growth during the fiscal year as a whole is forecast to be +0.6%, about

the same rate of growth as in the previous fiscal year.

In fiscal 2018, since the rise in demand related to the 2020 Tokyo Olympics will reach a peak, the increase in

public investments and redevelopment projects in the Tokyo metropolitan area will be factors boosting the

economy. However, the positive effects of the second supplementary budget for fiscal 2016 will run their course,

and growth in public investment will turn negative. In part because of the rise in prices of crude oil and natural

resources, domestic prices will rise, and the rate of increase in real wages will weaken, which will reduce the

Carry-over from the previous year

Growth rate during the year

Real GDP growth rate

(A) (B) (A)+(B)FY2015(actual) 1.0 % -0.1 % 0.9 %FY2016

(forecast) 0.3 % 0.8 % 1.1 %FY2017

(forecast) 0.3 % 0.6 % 0.9 %FY2017

(forecast) 0.2 % 0.5 % 0.8 %

Source: Cabinet Office, "Quarterly Estimates of GDP"

Chart 2.Real GDP growth rate and the carryover effect

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momentum of consumer spending. Other negative factors may be a decline in rates of growth in overseas

economies due to the continuation of monetary tightening in the United States and a more-moderate pace of

increase in exports. For this reason, the rate of growth in real GDP is expected to drop to +0.8%.

The outlook for principal sectors and other economic indicators is as follows.

(1) Households As structural demographic change occurs, with the productive-age population (15 to 64 years) decreasing, the

supply and demand balance for labor during the forecast period is expected to remain tight, and, in some

industries, the feeling that labor is in short supply will likely become more serious. The unemployment ratio is

forecast to be low and stable, and, compared with 3.3% in fiscal 2015, the ratio in fiscal 2018 is forecast to decline

to 2.9%. Reflecting the increasing participation of women and seniors in the workforce, the outlook is for the

number of employed persons to increase gradually.

Although employment conditions like these are supposed to make it easier for wages to rise, the environment for

corporations has become severe, and, even though they raised base wages in the 2016 spring labor offensive

also, for the third consecutive year, the rate of increase was smaller than in the previous year. For this reason, in

fiscal 2016, although total worker cash compensation is increasing, the margin of increase is expected to be a

moderate 0.4% over the previous year, because of the increase in part-time relatively lower wage earners,

0.4 0.9

2.0

-0.9

0.9 1.1 0.9 0.8

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11 12 13 14 15 16 17 18

Chart 3. Real GDP growth rate by demand(Fiscal year)

Private Consumption Private Capital InvestmentGovernment Expenditure Inventory InvestmentExports ImportsReal GDP Growth

Forecast

(Yr/Yr, %)

Source: Cabinet Office "Quarterly Estimates of GDP"

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principally female workers. Also, even though summer bonuses increased, the level in the previous year was low,

thus pushing the rate of increase this year upward. Winter bonuses also will rise only by a small percentage. In

addition, even though the business environment for corporations may become somewhat less severe in fiscal

2017, it seems likely that there will be no major change in the corporate stance to restrain wages, and the

increase in total worker cash compensation will remain at a low +0.3%.

However, although growth in per capita wages will be sluggish, the number of employed persons will continue to

rise. Therefore, following the firm increase of 1.7% in nominal employee compensation in fiscal 2015, the

increase in fiscal 2016 is forecast to be 2.0%, and will be followed by 1.4% in fiscal 2017, and then a rise of 1.1%

in fiscal 2018. Real worker compensation, which rose 1.8% in fiscal 2015, is forecast to rise to 2.4% in fiscal 2016

as price levels remain stable. However, since the rate of price increases will move upward, the rate of increase in

real worker compensation in fiscal 2017 is forecast to decline to 1.2% and then slow further to 0.7% in fiscal 2018.

Despite increases in real income, consumer spending in fiscal 2016 is showing little growth, reflecting the rising

trend toward frugality among consumers and weakness in consumer confidence, but, in the October-December

quarter, when the restraining effects of unseasonable weather will have run their course, consumer spending is

expected to show firmer trends. Compared to the decline of 0.1% in fiscal 2015, consumption is forecast to rise

0.7%, for the first increase in three years. In fiscal 2017, the rate of increase will likely continue to rise at a firm

0.7%. However, in fiscal 2018, as the rate of increase in real incomes weakens, consumer spending growth will

decline to +0.4%.

In housing, the number of new housing starts has peaked out, but here, too, for the time being, there is a

possibility that starts will remain at a high level, mainly for rental housing. However, although housing loan rates

are at the lowest level in history, there is a possibility that the continuing rise in housing prices will restrain growth

in sales. In addition, starts of new rental housing, which boost the total, may eventually decline because of the

effects of the rise in the percentage of vacant rental housing. In fiscal 2016, housing starts are forecast to rise

above the 921,000 units recorded in fiscal 2015, to 980,000, but then decline to 938,000 in fiscal 2017. Note that

when the consumption tax rate is scheduled to be raised in October 2019, as at the time of the previous tax

increase to 8%, we are assuming that a special measure will be implemented that will allow new housing starts

that are contracted for six months before the upcoming tax increase is implemented to be taxed at the previous

rate, and we are expecting a surge in demand for new housing starts in advance of the tax increase during the

latter half of fiscal 2018. For this reason, we expect the number of housing starts in fiscal 2018 to recover to

952,000.

(2) Corporations In fiscal 2016, corporations are expected to report declines in sales and profits, but, in the latter half of the fiscal

year, the brakes will be applied to the deterioration in performance, and movements toward improvement will

grow stronger. During the first half of the fiscal year, the performance of exporting companies was adversely

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affected by the appreciation of the yen. In addition, corporations in consumer goods and other consumer-related

fields showed a deterioration in performance owing to the stagnation in consumer spending. However, the

appreciation of the yen has stopped, and consumer spending is expected to begin to show moderate

improvement in the latter half of fiscal 2016. Accordingly, the outlook is for an improvement in corporate

performance. While personnel and other fixed costs are expected to rise, on the other hand, prices of crude oil

and other natural resources are showing only moderate increases after having bottomed out. Another factor that

will support improvement in corporate performance will be the continuing positive impact of restructuring efforts

thus far, which have given corporations a high profitability business position.

For the fiscal year, ordinary profit is forecast to decline 3.7% year on year, the first decrease in five years. In

manufacturing, which is more sensitive to yen appreciation, ordinary profit is forecast to decline a substantial

11.9%. On the other hand, ordinary profit in nonmanufacturing is forecast to increase 0.3% year on year, and

companies in this sector are expected to earn profits similar to the previous year.

In fiscal 2017, the terms of trade are forecast to deteriorate because of the increase in raw material costs; in

addition, personnel costs will continue to increase. On the other hand, sales are expected to improve, reflecting

the recovery in demand in Japan and overseas, and, as a consequence, ordinary profit is expected to begin to

recover, showing an increase of 2.7%. In fiscal 2018, the yen is expected to begin to appreciate again, and there

is a possibility that performances of exporting companies may deteriorate, and ordinary profit will rise only 0.5%.

The cautious stance of corporations have toward capital investment is expected to continue, but, with ample cash

flows on hand, companies are not expected to cut necessary investments to a bare minimum. For this reason, if

corporate performance improves going into fiscal 2017, companies may resume some investments, including

those they have been postponing, investments for coping with labor shortages, investments for maintaining

competitiveness, investments for the maintenance and replacement of existing equipment, and investments in IT

systems and software. As a consequence, capital investment may turn upward moderately and become a factor

supporting the economy. In addition, investments in areas where supply shortages exist, including the

construction of hotels, office buildings, warehouses, and logistics centers, are expected to remain firm.

Nevertheless, companies are expected to continue to refrain from aggressive investments to increase capacity in

Japan, and this will preclude any major increases in investment. Although some companies and industries are

seen as likely to move production facilities they had previously located overseas back to Japan, this trend is not

widespread across industries. In addition, although lending interest rates are declining following the introduction

of negative interest rates, corporations have ample cash flows, and the level of rates is already low, it seems

unlikely that the decline in interest rates will kindle the desire to invest among corporations.

Real private capital investment, which rose 2.1% in fiscal 2015, is forecast to remain virtually level, rising only

0.3% over the previous year in fiscal 2016. In fiscal 2017, in part because of the improvement in corporate

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performance, investment in real terms is forecast to rise 1.5% and then increase further to 2.8% along with

redevelopment projects in the Tokyo metropolitan area in advance of the 2020 Olympic Games.

(3) Government Regarding public investment, although the boosting effect of the fiscal 2015 supplementary budget will run its

course, the outlook is for growth in public investment to rise again as demand for reconstruction and recovery

work following the Kumamoto earthquakes rises toward the end of fiscal 2016 and allocations under the second

supplementary budget for fiscal 2016 are spent. For this reason, government public works spending in fiscal 2016

is forecast to increase 0.9%, the first rise in three years.

In fiscal 2017, the rate of expansion in public works is expected to rise to 1.6%, reflecting the boosting effects of

budgetary allocations in the second supplementary budget for fiscal 2016. In fiscal 2018, demand related to

building the infrastructure needed for holding the Tokyo Olympics will rise to a peak and boost public investment,

but the positive impact of budget allocations under the second supplementary budget for fiscal 2016 will run their

course, and public investment will begin to decline, falling 2.6%, the first decrease in three years.

Regarding government consumption expenditures, as the demographic aging of the population continues, there

is a strong likelihood that the rising trend will continue, mainly for medical expenditures.

(4) External Sector Since overseas economies show improvement, exports will maintain a moderate rising trend after the latter half of

fiscal 2016, and in fiscal 2017 also, overseas economies are expected to show further improvement, and the pace

of increase will be sustained. However, a sharp rise in export growth should not be expected because of the

impact of the relocation of many production bases overseas. The movement seen in some manufacturing

industries of bringing production facilities back to Japan to avert increases in import costs will be on a small scale,

and it is unlikely there will be a major movement toward resuming exports from Japan.

Regarding overseas economies, as the timing of increases in U.S. interest rates has been pushed forward, the

high values of the dollar have been corrected, and the trend toward outflows of funds from the newly emerging

countries has been halted. Along with this, the turmoil in financial markets is quieting down. Since the U.S.

economy, centered around the household sector, is showing firm performance, it seems likely that the FOMC will

tighten monetary conditions in December. However, thereafter, unless the pace of tightening is increased, it is

likely that a return of turmoil in financial markets can be avoided. In addition, in the Eurozone, moderate economic

expansion is continuing as exports rise against a background of a cheaper euro. In China, the pace of the

downward trend in the economy is moderating as a result of the positive impact of economic policies, and,

although the downtrend in growth rates is forecast to continue, the implementation of economic policies, including

the “One Belt, One Road” concept (the Silk Road Economic Belt and the 21st Century Maritime Silk Road plans)

as well as China’s 13th five-year plan, will be factors providing support for the economy.

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Moreover, the currencies of the newly emerging and resource-producing countries are also strengthening, the

turmoil in international financial markets is subsiding, and the prices of crude oil and other natural resources have

begun to rise from their temporarily low levels. In addition, the turmoil in international financial markets created by

the U.K. decision to leave the EU is also diminishing because of judgments that the effects of the U.K. move will

be short-term and minor and have only a marginal impact on the world economy.

In 2017, major policy-linked elections are scheduled in Europe (a general election in the Netherlands in March, an

election for the presidency of France in April and May along with a general election in June, and a general

election in Germany in September). In each of these countries, opposition to the immigrant issue and income

differentials are rising, and we cannot rule out the possibility of situations that will create turmoil in financial

markets similar to those that occurred following Trump’s election in the United States. In addition, there are

uncertain factors surrounding the possible impact on financial markets as positive expectations about the newly

elected President Trump weaken. However, provided this turmoil is temporary, the recovery in the world economy

will most likely gather strength.

On the other hand, reflecting the improvement in domestic demand and the rising penetration of imports into the

Japanese market, since growth in imports is expected to continue, the contribution of the external sector is

expected to remain small. The contribution of external demand to GDP growth is forecast to be +0.3% in fiscal

2016, and, thereafter, in fiscal 2017, a positive contribution of +0.1% is expected. In fiscal 2018, growth in

overseas economies may slow along with the resumption of monetary stringency in the United States, and, since

Japan’s exports will stagnate, the contribution of the external sector is forecast to decrease to –0.1%.

Turning to imports, the impact of the increase in energy fuel imports for generating electric power, including the

rise in LNG imports following the Great East Japan Earthquake, has run its course, and, henceforth, the rise in

imports is expected to continue to be in line with domestic electric power demand. However, since prices of crude

oil and other natural resource will continue to rise, the value of imports will remain on an upward trend. As a

result, the recent surpluses in Japan’s trade balance will gradually diminish, and the trade balance is forecast to

move into the red again in fiscal 2018.

(5) Production The index of industrial production declined in both fiscal 2014 and fiscal 2015. Factors accounting for this

included declines in exports owing to weakness in overseas economies, the continued weakness of domestic

demand, principally personal consumption, and the continued measures among corporations to cut back

production capacity in Japan and move production bases overseas even under the depreciation of the yen.

However, in the April–June quarter of 2016, industrial production began to rise, moving up 0.2% from the previous

quarter. Thereafter, industrial production rose 1.3% in the July-September quarter, reflecting the boosting effect of

the continuation of the comeback in production in the automobile industry and increased production of materials

14 / 23

for smartphones. Hereafter, a rising trend in production is expected to continue along with recovery in exports and

improvement in domestic demand, centering around private consumption.

In fiscal 2016, production is expected to rise 0.1% or remain at about the same level as in the previous fiscal year.

In fiscal 2017, the improving trend will continue, and production is expected to rise 1.6% and then rise by a further

1.2 percentage points in fiscal 2018. Since the level of inventories remains high, there is the possibility that

restraints on production will continue for the time being; however, along with the improving trend in demand, this

downward pressure on production may ease.

(6) Commodity Markets, Foreign Exchange, and Prices In 2015, the price of crude oil plunged because of predictions of a decline in demand caused by uncertainty

regarding the future course of the world economy and a sense of excessive supply worldwide caused by the

decision by OPEC not to decrease production, the plateauing of shale oil production at a high level, the

resumption of oil exports from Iran, and other factors. However, after the beginning of 2016, some oil-producing

countries made moves toward freezing any increases in production, and crude oil prices turned upward. However,

since there are possibilities that conflicts may emerge among suppliers regarding production share and that some

suppliers will not freeze production, there is a tendency to think oversupply conditions will persist. After reaching a

price of about US$50 per barrel in June this year, the crude oil price has moved into the US$40 range, but, as the

world economy recovers and moderate improvement in demand seems likely to continue, oil prices seem likely to

shift to a gradual rising trend. However, as growth in crude oil demand will be gradual, because of the trends

toward energy conservation and improved automobile gas mileage, and since the oil-producing countries,

including the OPEC nations, are adopting a cautious stance to reducing oil production, thereafter, the outlook is

for the pace of increase in crude oil prices to be gradual.

Regarding the yen/U.S. dollar exchange rate, as a result of the worldwide tendency to avoid risk taking, the yen

rose in value from the middle of 2015. However, at present, under the newly-elected President Trump, because of

positive expectations about recovery in the U.S. economy and the rising prospects for a tighter monetary policy

there, the yen is weakening and the dollar is strengthening. Although there is a possibility that the yen/U.S. dollar

rate will be influenced by such expectations for the time being, to increase exports from the United States, there is

a tendency to speculate that President Trump will opt for policies that make the dollar weaker, and yen

depreciation will have its limits. In any event, the outlook is for an upward revaluation of the yen, and, as we move

into fiscal 2017, the yen may begin to appreciate again, moving to ¥100 to the U.S. dollar or even below that level.

However, if we consider the possibility that Japan may undertake another round of monetary easing measures

and the United States may take further monetary tightening measures after the beginning of 2017, it would be

difficult to imagine a major upward valuation of the yen.

As a result of the influence of the decline in crude oil prices and other factors, energy prices in Japan have

declined, and the year-on-year rates of change in the consumer price index (CPI) (excluding fresh foods) are now

15 / 23

negative compared with the previous year. Although crude oil prices have bottomed out, they remain low in

comparison with levels in the same periods of the previous year. As a consequence, year-on-year declines in the

CPI (excluding fresh foods) are expected to continue during 2016 because of the drop in energy prices. In

addition, the impact of the stronger yen on import prices will gradually move through the economy. However, the

margins of decline are not expected to increase substantially, since service prices are rising, reflecting increases

in wages. As a result, there is little concern about the return of a deflationary spiral. Beginning in 2017, since

energy prices are expected to rise, the outlook is for year-on-year negative figures to be corrected. Also, moving

into fiscal 2018, the rate of increase in energy prices is expected to rise, and, since personnel costs will continue

to move upward, the margins of increase are forecast to rise somewhat. Although the CPI (excluding fresh foods)

in fiscal 2015 was virtually level with the previous fiscal year, and is forecast to decline 0.3% in fiscal 2016,

staying virtually level with the previous year, the CPI is forecast to rise 0.4% in fiscal 2017 and then increase

further to +0.5% in fiscal 2018.

(7) Financial Policy and Interest Rates On September 21, the BOJ introduced a new policy framework entitled “Quantitative and Qualitative Monetary

Easing with Yield Curve Control” with the aim of the further relaxation of monetary policy. It is expected that the

BOJ will leave the negative margin of the policy interest rate at –0.1% and maintain zero percent interest on

10-year government bonds. Therefore, the outlook is basically for these rates and long- and short-term interest

rates to remain at current levels.

However, in cases where there is a sharp appreciation of the yen or other cases where the BOJ cannot sustain

the level of quantitative purchases and must reduce them, there is a possibility that the negative interest margin

may be lowered.

16 / 23

【GDP demand】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Contribution of domestic demand -1.6 0.8 0.7 0.8 0.8

0.5 0.3 -0.1 0.0 0.1

Contribution of external demand 0.6 0.1 0.3 0.1 -0.1

2.5 1.4 -0.0 -0.2 -0.1

【Overseas economy and market data】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Real GDP (US) (CY) 2.4 2.6 1.6 2.1 1.9 Real GDP (Euro zone) (CY) 1.2 1.9 1.6 1.5 1.5 Real GDP (Asia) 6.5 6.1 6.0 5.9 5.8

Real GDP (China) 7.3 6.9 6.7 6.5 6.4 Yen/U.S.Dollar 109.9 120.1 105.1 104.7 100.6 Uncollateralized call rates (O/N) (%)* 0.068 0.063 -0.044 -0.078 -0.055 TIBOR (3months) 0.196 0.155 0.057 0.020 0.045 Newly issued government bond yields (10years) (%) 0.48 0.29 -0.09 0.01 0.18 WTI future price (near month contract, US dollar/barrel) 80.5 45.0 46.1 49.7 54.8 Dubai crude oil prices (US dollar/barrel) 83.6 45.6 44.4 48.2 53.3

Economic Outlook for fiscal 2016-2018

2.3 1.0 0.7

Real GDP -0.9 0.9 1.1

Nominal GDP 1.5

0.9

-0.1 0.7 0.7

6.4 -3.0

Private consumption -2.9

Contribution of inventory investment

Government expenditure

2.1 0.3 1.5

Housing investment -11.7 2.4

Private capital investment 0.1

0.7 1.1 1.1

Government final consumption expenditure 0.1 1.6 1.2

-0.3

1.0

Public investment -2.6 -2.7 0.9 1.6

3.4 0.0 -1.5 1.2

Export of goods and services 7.9 0.4

* actual=average, forecast=end of period

GDP deflator

0.2 1.7

Import of goods and services 1.4

0.6

0.8

0.4

1.0

2.8

0.3

1.0

-2.6

1.0

forecast

forecast

17 / 23

【External demand (export and import)】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Value of exports (Yen base) 5.4 -0.7 -8.0 2.7 0.6 1.3 -2.7 0.3 1.1 0.8

Value of imports (Yen base) -1.0 -10.3 -13.6 5.1 3.5-2.1 -1.8 -0.3 1.5 1.4

Balance (trillion yen) -9.1 -1.1 3.2 1.8 -0.2 Current account balance (trillion yen) 8.7 18.0 18.9 18.6 16.5

balance on goods (trillion yen) -6.6 0.5 4.9 4.0 2.2 balance on service (trillion yen) -2.7 -1.1 -1.4 -1.3 -1.4 balance on income (trillion yen) 20.0 20.6 17.6 18.0 17.7

【Corporations】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Industrial production -0.5 -1.0 0.1 1.6 1.2 Inventory index 6.1 1.8 -4.5 -0.0 0.2 Sales 1.4 -1.3 -2.1 1.6 1.2 Ordinary Profits 5.9 4.9 -3.7 2.7 0.5

【Income and employment】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Income per capita 0.5 0.2 0.4 0.3 0.4Scheduled -0.2 0.3 0.2 0.1 0.2

Non-scheduled 1.6 0.4 0.5 2.1 1.7 Wage increase rate (%) 2.19 2.38 2.14 2.00 2.10 Employee 0.8 1.0 1.4 0.8 0.6 Nominal compensation of employees* 1.9 1.7 2.0 1.4 1.1 Unemployment rate (%) 3.5 3.3 3.1 3.0 2.9*GDP base

【Goods prices】Yr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Domestic corporate goods prices 2.7 -3.2 -2.8 0.3 0.0-0.1 0.3 0.1

Consumer prices 3.0 0.2 -0.2 0.3 0.5 1.0 0.9 -0.3

excluding freshfood 2.9 -0.0 -0.3 0.4 0.5 0.9 0.4 0.0excluding tax effects

Ammount (Yr/Yr,%)

Ammount (Yr/Yr,%)

excluding food (excluding alcoholic beverages) and energy 0.4 2.2 0.6 0.2 0.1

excluding tax effects

excluding tax effects

forecast

forecast

forecast

forecast

18 / 23

【 New housing starts】 annualized, ten thousand unitsYr/Yr、 %

FY 2014 FY 2015 FY 2016 FY 2017 FY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

88.0 92.1 98.0 93.8 95.2-10.8 4.6 6.4 -4.2 1.5 27.8 28.4 29.8 29.8 30.3-21.1 2.2 4.8 -0.0 1.8 35.8 38.4 43.2 40.3 40.3-3.1 7.1 12.5 -6.6 -0.1 23.6 24.7 24.5 23.0 23.9-8.9 4.5 -0.7 -6.1 3.9

New housing starts

Owned

Rented

Built for Sale

forecast

19 / 23

【GDP demand】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Contribution of domestic demand 1.7 0.0 0.1 0.6 0.8

-0.2 0.2 0.6 -0.1 -0.0

Contribution of external demand -0.3 -0.0 0.4 0.2 0.2

-0.6 1.7 2.0 0.4 -0.3

【Overseas economy and market data】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Real GDP (US) (CY) 2.4 2.6 1.6 2.1 1.9 Real GDP (Euro zone) (CY) 1.2 1.9 1.6 1.5 1.5 Real GDP (Asia) 6.5 6.1 6.0 5.9 5.8

Real GDP (China) 7.3 6.9 6.7 6.5 6.4 Yen/U.S.Dollar 105.8 121.0 107.8 105.1 101.8 Uncollateralized call rates (O/N) (%)* 0.068 0.073 -0.025 -0.068 -0.075 TIBOR (3months) 0.206 0.168 0.075 0.028 0.025 Newly issued government bond yields (10years) (%) 0.55 0.36 -0.06 -0.02 0.13 WTI future price (near month contract, US dollar/barrel) 93.0 48.8 42.7 48.5 53.6 Dubai crude oil prices (US dollar/barrel) 96.7 51.0 40.7 47.0 52.1

Import of goods and services

* actual=average, forecast=end of period

0.4 -1.7

GDP deflator

3.1 7.2

Export of goods and services 1.2 8.3 2.8 -0.6

Public investment 1.9 0.1

Government final consumption expenditure 8.0 0.4 -2.5 -1.6

1.2 1.6

1.6 0.3

Contribution of inventory investment

Government expenditure 2.9 0.3 0.4

Private capital investment -0.5 3.1

1.0

0.8 1.6

-1.2 0.4

Housing investment 8.4 -5.3 -2.5 5.8

Private consumption 1.7 -0.9

Economic Outlook for calendar 2014-2018

0.4

0.7

1.0

0.8

-1.5

1.0

1.3

3.3

0.9

1.5

2.5 1.2

Real GDP 1.4 -0.0 0.6 0.8

Nominal GDP

forecast

forecast

20 / 23

【External demand (export and import)】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Value of exports (Yen base) 5.4 -0.7 -8.0 2.7 0.6 1.3 -2.7 0.3 1.1 0.8

Value of imports (Yen base) -1.0 -10.3 -13.6 5.1 3.5-2.1 -1.8 -0.3 1.5 1.4

Balance (trillion yen) -9.1 -1.1 3.2 1.8 -0.2 Current account balance (trillion yen) 4.5 3.9 16.4 19.6 18.9

balance on goods (trillion yen) -8.8 -10.5 -0.6 5.0 4.4 balance on service (trillion yen) -3.5 -3.0 -1.7 -1.2 -1.3 balance on income (trillion yen) 17.7 19.4 20.7 18.0 17.9

【Corporations】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Industrial production 2.1 2.1 -1.2 -0.5 1.4 Inventory index 6.2 0.0 -2.2 -0.4 0.3 Sales 3.0 -0.5 -3.0 1.2 1.3 Ordinary Profits 10.9 7.5 -6.8 2.9 1.6

【Income and employment】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Income per capita 0.4 0.1 0.5 0.3 0.4Scheduled -0.4 0.3 0.2 0.1 0.1

Non-scheduled 2.7 0.4 0.1 2.1 1.8 Real wage indices -2.9 -0.8 0.8 -0.1 -0.2 Number of mployees 0.7 0.8 1.5 0.9 0.6 Nominal compensation of employees* 1.6 1.6 2.2 1.5 1.2 Unemployment rate (%) 3.6 3.4 3.1 3.0 2.9*GDP base

【Goods prices】Yr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018

(actual) (forecast) (forecast) (forecast) (forecast)

Domestic corporate goods prices (Yr/Yr,%) 3.1 -2.3 -3.5 0.0 0.3 1.0 0.0 0.2

Consumer prices 2.7 0.8 -0.2 0.3 0.4 1.2 0.2 0.1

excluding freshfood 2.7 0.5 -0.3 0.2 0.5 1.1 0.2 0.1

1.9 1.0 0.4 0.0

excluding tax effects

excluding tax effects

excluding food (excluding alcoholic beverages) and energy

excluding tax effects

Ammount (Yr/Yr,%)

Ammount (Yr/Yr,%)

0.4

forecast

forecast

forecast

forecast

21 / 23

【 New housing starts】 annualized, ten thousand unitsYr/Yr、 %

CY 2014 CY 2015 CY 2016 CY 2017 CY 2018(actual) (forecast) (forecast) (forecast) (forecast)

89.3 90.9 97.7 94.5 94.2-8.6 1.8 7.4 -3.3 -0.3 28.7 28.4 29.7 29.8 30.0-18.8 -1.1 4.6 0.4 0.8 36.3 37.9 42.4 40.9 40.0 2.3 4.3 12.0 -3.6 -2.0 23.7 24.1 25.1 23.3 23.5-10.1 1.6 3.9 -7.2 1.2

Rented

Built for Sale

New housing starts

Owned

forecast

22 / 23

Qr/Qr,%Yr/Yr,%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3(Qr/Qr,%) -0.1 0.8 -0.3 0.8 0.1 0.2 0.1 0.3 0.1 0.2 0.1 0.1 0.2 0.2 0.2 0.3

Annualized rate -0.5 3.2 -1.2 3.0 0.6 0.8 0.4 1.3 0.3 0.8 0.5 0.2 0.7 1.0 0.7 1.1(Yr/Yr,%) 2.2 3.6 2.2 1.1 1.4 0.8 1.5 0.5 0.7 0.7 0.8 0.6 0.5 0.5 0.6 1.0(Qr/Qr,%) -0.3 0.4 -0.4 0.5 0.2 0.5 0.3 0.1 0.3 0.2 0.2 0.1 0.1 0.2 0.3 0.2

Annualized rate -1.3 1.6 -1.6 2.1 0.7 2.2 1.1 0.4 1.1 1.0 1.0 0.3 0.5 0.8 1.2 0.9(Yr/Yr,%) 0.8 1.9 0.7 0.2 0.6 0.9 1.5 1.2 1.1 0.9 0.8 0.8 0.7 0.7 0.7 1.0

Contribution of domestic demand　(Qr/Qr,%) -0.1 0.4 -0.5 0.4 0.3 0.1 0.3 0.1 0.3 0.2 0.3 0.1 0.1 0.2 0.3 0.2-0.6 0.5 -0.8 0.7 0.1 0.1 0.3 0.2 0.2 0.1 0.2 0.1 0.1 0.1 0.2 0.1 0.1 0.5 -1.0 -0.2 0.5 0.1 1.2 0.8 0.9 0.9 0.6 0.5 0.4 0.4 0.4 0.4 1.7 1.2 -0.4 -0.3 5.0 2.3 1.0 -3.5 -1.5 -0.8 2.4 -2.0 -1.0 0.5 3.8 1.0-3.3 5.9 4.8 2.0 5.7 7.1 8.1 4.7 -1.7 -4.6 -3.5 -2.0 -1.4 -0.1 1.2 4.3-1.0 0.8 1.2 -0.7 -0.1 0.0 0.1 0.3 0.3 0.5 0.5 0.6 0.7 0.8 0.7 0.9 1.4 2.7 4.1 0.5 1.0 0.3 -0.8 0.4 0.6 1.2 1.7 2.1 2.3 2.6 2.8 3.1 0.3 0.0 -0.1 -0.1 0.1 -0.1 0.0 -0.1 0.1 0.1 0.0 0.0 -0.0 0.0 -0.0 -0.0 0.4 -0.0 -0.1 0.8 0.1 0.2 0.2 0.7 0.4 0.1 0.1 -0.1 0.0 0.1 0.2 0.2 1.3 0.6 0.1 0.7 0.9 1.0 1.4 1.1 1.4 1.3 1.3 0.4 0.3 0.2 0.2 0.5 0.4 0.3 0.6 0.9 -0.3 0.4 0.2 0.3 0.2 0.2 0.3 0.3 0.2 0.2 0.3 0.2 1.3 1.2 1.6 2.2 1.5 1.6 1.2 0.6 1.1 0.9 1.0 1.0 1.0 1.0 1.0 0.9 0.6 -1.2 -3.4 0.0 2.3 -0.7 0.4 2.3 1.3 -0.4 -0.9 -1.5 -0.7 -0.4 -0.1 0.1 2.1 -0.7 -5.3 -4.7 -2.2 -1.7 2.1 3.9 3.4 3.7 2.3 -1.8 -3.5 -3.4 -2.6 -1.2

Contribution of external demand　(Qr/Qr,%) -0.3 -0.0 0.1 0.1 -0.2 0.5 -0.0 0.0 0.0 -0.0 -0.0 -0.0 -0.0 -0.0 -0.0 -0.0-4.2 2.6 -1.0 0.1 -1.5 2.0 0.1 0.1 0.4 0.4 0.4 0.3 0.2 0.3 0.2 0.2 2.0 3.2 -0.9 -2.5 -0.2 -0.4 0.7 0.7 2.5 1.3 1.4 1.6 1.2 1.2 0.9 0.8-2.5 2.4 -1.2 -0.6 -0.6 -0.6 0.3 0.1 0.4 0.4 0.5 0.4 0.3 0.3 0.3 0.3 0.7 1.6 -0.3 -1.9 -0.3 -3.1 -1.5 -1.2 0.2 1.2 1.5 1.7 1.7 1.5 1.3 1.1 1.4 1.7 1.5 0.9 0.7 -0.1 -0.1 -0.7 -0.4 -0.2 -0.0 -0.2 -0.2 -0.2 -0.1 -0.0

【Overseas economy and market data】

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 Real GDP (US)

(Annualized Qr/Qr rate,%) Real GDP (Euro zone)

(Annualized Qr/Qr rate,%) Real GDP (Asia) (Yr/Yr,%) 6.1 6.0 5.9 5.9 6.0 6.0 5.9 6.0 6.0 5.9 5.8 5.9 5.9 5.8 5.7 5.8

Real GDP (China) (Yr/Yr,%) 7.0 6.9 6.8 6.7 6.7 6.7 6.6 6.6 6.6 6.5 6.4 6.5 6.5 6.4 6.3 6.4 Yen/U.S.Dollar 121.3 122.2 121.5 115.4 108.2 102.4 105.0 105.0 105.3 105.3 104.7 103.6 102.4 101.2 100.0 98.8 Uncollateralized call rates (O/N) (%)* 0.067 0.075 0.076 0.034 -0.050 -0.046 -0.038 -0.040 -0.073 -0.080 -0.080 -0.080 -0.080 -0.080 -0.060 0.000 TIBOR (3months) 0.169 0.161 0.166 0.124 0.068 0.058 0.051 0.050 0.020 0.020 0.020 0.020 0.020 0.020 0.040 0.100 Newly issued government bond yields (10years) (%) 0.40 0.39 0.31 0.06 -0.12 -0.13 -0.05 -0.04 -0.03 -0.02 0.00 0.10 0.10 0.10 0.20 0.30 WTI future price (near month contract, US dollar/barrel) 57.9 46.4 42.2 33.5 45.6 44.9 46.9 46.8 47.7 48.9 50.4 51.9 52.8 54.0 55.5 57.0 Dubai crude oil prices (US dollar/barrel) 60.9 50.0 41.0 30.7 43.2 43.4 45.5 45.3 46.2 47.4 48.9 50.4 51.3 52.5 54.0 55.5 * actual=average, forecast=end of period

【External demand (export and import)】Yr/Yr、% Yr/Yr、%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 Value of exports (Yen base) 6.7 3.7 -4.6 -7.9 -9.5 -10.2 -8.2 -3.6 1.6 3.2 3.5 2.6 1.8 1.1 0.0 -0.5

-0.6 -2.9 -4.1 -3.2 -1.3 1.0 0.6 0.7 1.1 1.0 1.1 1.0 0.9 0.8 0.8 0.7-3.1 -2.0 0.5 0.1 -0.0 0.3 0.2 0.3 0.3 0.3 0.2 0.2 0.2 0.2 0.2 0.1

Value of imports (Yen base) -5.3 -5.9 -13.9 -15.7 -18.8 -19.5 -11.8 -2.9 4.1 6.5 4.7 5.2 4.8 4.3 2.8 2.1-2.2 -1.9 -2.5 -0.8 -1.3 -0.7 0.4 0.4 1.3 1.4 1.6 1.7 1.6 1.4 1.3 1.5-0.3 -0.1 -1.2 0.5 -0.6 0.5 0.1 0.3 0.4 0.5 0.4 0.3 0.4 0.3 0.3 0.5

Balance (trillion yen) -0.3 -1.0 -0.1 0.3 1.5 1.0 0.6 0.2 1.1 0.5 0.4 -0.2 0.6 -0.0 -0.1 -0.7 Current account balance (trillion yen)* 4.0 4.0 4.8 5.0 4.6 4.9 4.7 4.7 4.8 4.7 4.6 4.5 4.4 4.1 4.0 3.9

Balance on goods (trillion yen)* -0.4 -0.4 0.4 0.9 1.2 1.5 1.2 1.1 1.2 1.1 1.0 0.8 0.7 0.5 0.5 0.4 Balance on service (trillion yen)* -0.5 -0.2 -0.3 -0.1 -0.4 -0.4 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.3 -0.4 -0.4 Balance on income (trillion yen)* 5.3 5.2 5.3 4.7 4.3 4.4 4.4 4.4 4.5 4.5 4.5 4.5 4.5 4.4 4.4 4.3

*seasonally adjusted

Economic Outlook (Quarterly)

Ammount (Qr/Qr,%)

FY 2015 FY 2016

Ammount (Yr/Yr,%）

Ammount (Qr/Qr,%)

Ammount (Yr/Yr,%）

1.2 1.3 1.4 1.6 1.5 1.4 1.8 2.1

FY 2015 FY 2016

Government expenditure

Government final consumption expenditure

Public investment

Export of goods and services

Import of goods and services

GDP deflator　(Yr/Yr,%)

Nominal GDP

Real GDP

Private consumption

Housing investment

Private capital investment

Contribution of inventory investment　(Qr/Qr,%)

FY 2015 FY 2016 FY 2017

FY 2017

1.6 2.2 2.3 1.8 0.9 0.8 1.4 2.9 2.6 1.6 2.6 2.0

1.6 1.7 1.7 1.4

FY 2017

FY 2018

FY 2018

1.8 1.6 1.6 1.0

1.4 1.4 1.4 1.1

FY 2018

forecast

forecast

forecast

23 / 23

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【Corporations】Yr/Yr、%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3(Qr/Qr, %) -1.3 -1.0 0.1 -1.0 0.2 1.3 0.4 0.2 0.3 0.4 0.4 0.3 0.3 0.3 0.2 0.3(Yr/Yr, %) -0.8 -0.9 -0.8 -1.6 -1.8 0.4 0.9 0.9 2.3 1.3 1.3 1.4 1.3 1.3 1.1 1.1(Qr/Qr, %) 0.5 -0.5 -0.5 2.4 -1.3 -2.6 -0.4 -0.2 -0.1 0.0 0.0 0.1 0.0 0.1 0.1 0.0(Yr/Yr, %) 3.9 2.0 0.0 1.8 0.0 -2.0 -2.2 -4.5 -3.3 -0.7 -0.4 -0.0 0.1 0.2 0.3 0.2

Sales 1.1 0.1 -2.7 -3.3 -3.5 -3.4 -1.6 -0.0 1.1 1.7 2.0 1.5 1.3 1.2 1.1 1.1 Ordinary profits 23.8 9.0 -1.7 -9.3 -10.0 -5.6 -1.9 4.1 1.6 2.4 3.7 3.2 2.6 1.0 -0.3 -1.2

【Income and employment】Yr/Yr、%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 Income per capita -0.7 0.6 0.2 0.7 0.6 0.6 0.3 0.3 0.3 0.2 0.3 0.2 0.3 0.4 0.5 0.3

0.3 0.2 0.3 0.4 -0.1 0.3 0.2 0.1 0.1 0.0 0.0 0.1 0.1 0.2 0.2 0.2-1.1 1.2 1.4 0.1 0.5 -1.7 1.2 1.8 2.9 1.8 1.8 1.9 1.8 1.8 1.6 1.6

Real wage indices -1.4 0.2 -0.1 0.5 1.1 1.2 0.3 -0.0 -0.1 -0.2 -0.1 -0.2 -0.2 -0.2 -0.2 -0.3 Employee 0.7 0.7 1.0 1.5 1.6 1.5 1.5 1.0 1.0 0.8 0.7 0.6 0.6 0.6 0.6 0.5 Nominal compensation of employees* 0.9 1.7 1.9 2.5 2.0 2.0 2.2 1.7 1.6 1.3 1.4 1.2 1.3 1.3 1.1 0.8 Unemployment rate (%) 3.4 3.4 3.3 3.2 3.2 3.0 3.0 3.0 3.0 3.0 3.0 2.9 2.9 2.9 2.9 2.9※GDP base

【Goods prices】Yr/Yr、%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 Domestic corporate goods prices -2.2 -3.7 -3.7 -3.5 -4.4 -3.6 -2.4 -0.6 -0.3 0.4 0.5 0.6 0.2 0.1 0.0 -0.1

-0.3 0.4 0.5 0.6 0.2 0.1 0.0 -0.1 Consumer prices 0.6 0.1 0.2 0.0 -0.4 -0.5 0.0 0.2 0.2 0.3 0.3 0.4 0.4 0.5 0.6 0.5

0.2 0.3 0.3 0.4 0.0 0.0 0.0 0.0excluding freshfood 0.2 -0.2 -0.1 -0.1 -0.4 -0.5 -0.3 0.1 0.2 0.3 0.5 0.5 0.5 0.5 0.5 0.4

0.2 0.3 0.5 0.5 0.0 0.0 0.0 0.0

【 New housing starts】 annualized, ten thousand unitsYr/Yr、%

4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 4-6 7-9 10-12 1-3 95.6 91.7 86.8 94.7 100.5 98.2 97.3 95.8 94.8 94.0 93.4 93.1 93.2 94.2 96.4 97.3 7.6 6.2 -0.7 5.5 4.9 7.1 12.1 1.2 -5.7 -4.2 -4.0 -2.8 -1.7 0.1 3.2 4.6 29.1 28.6 26.9 29.3 29.8 29.8 29.8 29.8 29.9 29.7 29.7 29.9 29.6 29.7 30.9 31.1 2.2 4.8 0.2 1.7 2.1 3.9 11.2 1.7 0.4 -0.2 -0.4 0.2 -1.1 -0.0 4.3 4.3 38.6 40.3 36.1 38.8 42.8 44.9 43.1 41.8 40.9 40.5 40.1 39.7 39.9 40.1 40.3 40.9 5.3 16.5 1.3 6.0 11.0 11.2 19.3 7.6 -4.5 -9.7 -6.8 -5.0 -2.5 -1.0 0.5 3.0 27.3 22.9 23.1 25.6 27.1 23.7 23.8 23.6 23.3 23.1 23.0 22.9 23.1 23.7 24.5 24.6 18.8 -5.4 -3.6 9.3 -0.5 3.6 3.2 -8.2 -14.0 -2.7 -3.5 -3.2 -1.0 2.3 6.6 7.7

New housing starts

Owned

Rented

Built for Sale

0.0

FY 2015 FY 2016

0.6 0.7 0.6 0.6 0.2 0.10.5

FY 2015

Industrial production

Inventory index

excluding food (excluding alcoholic beverages) and energy

excluding tax effects

excluding tax effects

excluding tax effects

FY 2016

ScheduledNon-scheduled

FY 2015 FY 2016

FY 2015 FY 2016

FY 2017

FY 2017

FY 2017

FY 2017

-0.1 -0.1 0.1 0.2

FY 2018

FY 2018

FY 2018

0.4 0.4 0.5 0.5

FY 2018

forecast

forecast

forecast

forecast