The Medium to Long-Term Economic Outlook for Asia

The Medium to Long-Term Economic Outlook for Asia February 3, 2017 Yoko Takeda Mitsubishi Research Institute Copyright (C) Mitsubishi Research Institute, Inc.

Issues for discussion for Asian Economy Copyright (C) Mitsubishi Research Institute, Inc. 1

Issues for discussion both for Asia and global economy Can developed economies overcome secular stagnation? Can we address anti-globalization and dissatisfaction with inequality? Will new digital technologies evoke a paradigm shift of global competition? Will a huge middle/high income class emerge in Asia? Copyright (C) Mitsubishi Research Institute, Inc. 2

New digital technologies may evoke a paradigm shift Factors That Determine Firm s Location Labor cost Labor cost Demand factor Technology Infrastructure Demand factor Customization Technology AI, IoT, Robots Social infrastructure Intellectual property Privacy protection Cyber security 2015 2030 Source: MRI Copyright (C) Mitsubishi Research Institute, Inc. 3

Opportunities and disadvantages for emerging Asia Opportunities Some new technologies may diffuse rapidly in emerging economies due to the absence of vested interests. e.g. Mobile payments are rapidly becoming the norm in China. Disadvantages Jobs that were previously outsourced from developed economies to emerging economies may reverse course. e.g. Lack of skilled labor, immature legal system to protect privacy and patents. Copyright (C) Mitsubishi Research Institute, Inc. 4

Opportunities and disadvantages for emerging Asia Gross Merchandise Volume of Mobile Third-Party Payment in China Backshoring and Technology Intensity of the Sector in Europe, 2010 - Mid - 2012 40 35 30 25 20 15 10 5 0 (Trillion yuan) 0.1 0.2 1.2 6.0 Forecasts 10.2 15.7 21.9 28.5 35.4 2011 2012 2013 2014 2015 2016 2017 2018 2019 Source: iresearch Global Inc. Copyright (C) Mitsubishi Research Institute, Inc. 5 Technology intensity (classified by sectors) High technology sectors Medium-high technology sectors Medium-low technology sectors Low technology sectors 3.0% 2.7% 5.3% 7.5% 0% 5% 10% Share of backshoring firms Notes: Results for Austria, Switzerland, Germany, Denmark, Spain, France, Hungary, Portugal, Netherlands, Sweden and Slovenia. Total number of observations is 3,293. Source: Dachs, B. and C. Zanker (2015), Backshoring of Production Activities in European Manufacturing.

GDP per capita Will a huge middle/high income class emerge? GDP Growth Rates and GDP per Capita (2015 vs. 2030 forecast) 25,000 (US dollar) 20,000 22,468 2030 forecast 15,000 China 10,000 5,000 11,305 Thailand 5,742 9,869 Indonesia 4,960 7,990 Actual in 2015 India 0 3,362 1,617 0 1 2 3 4 5 6 7 8 9 Real GDP growth rates (%, the average rates over 2016-2030) Sources: IMF; MRI forecasts. Copyright (C) Mitsubishi Research Institute, Inc. 6

Consumption expenditure per capita / day Will a huge middle/high income class emerge? Population by Income Class in Emerging Asian Economies 2014 2030 Upper high (>$40) Lower high ($20-$40) 1.9 billion people 0.2 0.0 0.2 0.8 3.4 billion people Upper middle ($10-$20) 0.6 0.9 Medium middle ($4-$10) 1.1 1.5 Lower middle ($2-$4) Low (<$2) 1.0 0.8 0.6 0.1 Sources: United Nations; IMF; The World Bank; MRI estimates. Copyright (C) Mitsubishi Research Institute, Inc. 7 1.2 0.8 0.4 0.0 0.4 0.8 1.2 1.6 Billion people

Will a huge middle/high income class emerge? Volume of Nominal Household Consumption in Emerging and Developed Countries 35 (Trillion dollar) 32 30 25 20 21 Japan Brazil 29 India ASEAN Japan Euro Area 15 Euro Area 10 5 0 8 China USA USA China Emerging Developed Emerging Developed 2015 2030 Notes: All figures are MRI estimates. The ratios of household final consumption expenditure to GDP used for these estimates are the actual values of 2015. As for China, the ratio is set higher than the actual value on the assumption that China will shift to a consumption-driven economy. Sources: United Nations; IMF; The World Bank; MRI estimates. Copyright (C) Mitsubishi Research Institute, Inc. 8

Copyright (C) Mitsubishi Research Institute, Inc. 9 Global Outlook

MRI forecasts for global GDP growth rate Economic Outlook for Major Countries and Regions Going towards 2030 Euro Area 6.9% 5.7% 3.6% China Japan 2.6% USA. 2.0% 1.0% 0.6% 1.3% 1.0% 0.2% 2.2% 1.7% 2015 2020 2030 2015 2020 2030 2015 2020 2030 2015 2020 2030 7.6% 7.1% India 4.7% 4.8% 4.7% 3.8% ASEAN5 Brazil 1.9% 1.4% 2015 2020 2030 2015 2020 2030 2015 2020 2030 Copyright (C) Mitsubishi Research Institute, Inc. 10-3.8% Notes: Real GDP growth rates after 2016 are MRI forecasts. As for Japan, data and forecasts are presented on a fiscal year basis. Sources: MRI forecasts.

1980 1985 1990 1995 2000 2005 2010 2015 2020 2025 2030 Two possible catch-ups by 2030 Nominal GDP of Major Emerging and Developed Economies 45 40 (Trillion dollar) India China Forecasts US- China reversal 35 USA Japan 30 ASEAN10 Euro Area 25 20 15 Japan-India and Japan-ASEAN reversals 10 5 0 Note1: Estimation results vary substantially depending on the assumption of exchange rates. The GDP growth rates after 2016 are MRI forecasts. The exchange rates are generally based on the IMF forecasts. As for China, the yuan is assumed to appreciate until 2020, and to stabilize after 2021. The Indian Rupee is assumed to depreciate about 1% per year. Japanese Yen rates are MRI forecasts. Notes2: ASEAN10 refers to Indonesia, Malaysia, the Philippines, Singapore, Thailand, Vietnam, Brunei Darussalam, Laos, Myanmar, and Cambodia. Sources: IMF; MRI forecasts. Copyright (C) Mitsubishi Research Institute, Inc. 11

Copyright (C) Mitsubishi Research Institute, Inc. 12 Japan Outlook

Economic outlook for Japan Japan s Potential GDP Growth Rate 6 5 4 3 (Year-over-year percent change) 4.8 4.2 2.5 TFP Capital stock Labor Potential GDP Forecasts 2 1 0.6 0.7 0.6 0.6 0.4 0.3 0.1 0-1 Source: MRI estimates. Copyright (C) Mitsubishi Research Institute, Inc. 13

Promote innovation and mitigate demographic vortex Three prescriptions: Innovation e.g. AI, IoT, robots Economic system reform e.g. Labor market reform, social security reform More risk-taking by corporate sector e.g. Investments in new markets 6 5 4 3 2 1 0-1 Japan s Potential GDP (Higher-growth Scenario) (Year-over year percent change) 4.2 4.8 2.5 TFP Capital stock Labor Potential GDP 0.6 0.7 0.6 0.6 0.9 Forecasts 1.2 1.3 Sources: MRI questionnaires; Agency for National Resources and Energy; MRI estimates. Copyright (C) Mitsubishi Research Institute, Inc. 14

Conclusions Emerging Asian markets have marked growth potential. But, its actual performance depends on whether: (i) new digital technologies evoke a paradigm shift (ii) China can solve its structural problems (iii) emerging Asia can avoid the middle-income trap If Japan can conquer the challenges lying ahead, it has a chance to achieve both a high-quality growth and a sustainable society. Copyright (C) Mitsubishi Research Institute, Inc. 15

Appendix Economic Outlook for China Copyright (C) Mitsubishi Research Institute, Inc. 16

Economic outlook for China China s GDP growth rate may decline to 4 percent or lower in 2030 China s Potential GDP Growth Rate (Year-over-year percent change) 14 Labor 12 TFP 10 8 Forecasts Capital Stock Potential GDP 6 4 2 0-2 01-05 06-10 11-15 16-20 20-25 26-30 Sources: CEIC; MRI Estimates. Copyright (C) Mitsubishi Research Institute, Inc. 17

The strengths and weaknesses in China s economy 1Transformation to an innovation-driven economy underway Venture Capital Funding of Startups in China 80 ( Billion dollar ) 60 56 68 USA 40 37 China 20 15 1.1 0 1.0 Japan 2013 2014 2015 2016 Sources: Venture Enterprise Center; Bloomberg. Copyright (C) Mitsubishi Research Institute, Inc. 18

The strengths and weaknesses in China s economy 2Ballooning non-performing loan problems China s Corporate and General Government Debt Non Performing Loans 190 170 150 130 110 90 (Percent of GDP) Corporate debt 07 08 09 10 11 12 13 14 15 16 2.0 1.8 1.6 1.4 1.2 1.0 (%) (Trillion yuan) 2.0 Non-performing loan value (right scale) Non-performing loan ratio (left scale) 1.8 1.6 1.4 1.2 1.0 60 (Percent of GDP) 0.8 0.8 50 40 30 20 General Government debt 07 08 09 10 11 12 13 14 15 16 Note: Corporates are non-financial corporations, including state-owned enterprises. Source: BIS. Copyright (C) Mitsubishi Research Institute, Inc. 19 0.6 0.4 0.2 0.0 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 2012 2013 2014 2015 2016 Sources: CEIC; China Banking Regulatory Commission. 0.6 0.4 0.2 0.0

The strengths and weaknesses in China s economy 3Looming social instability due to rapidly aging Ratio of People Over 65 Years Old 15 (100 million people) (%) 30 Forecasts 25 14 20 15 13 10 12 Total population (left scale) Ratio of people over 65 years old (right scale) 2000 2010 2020 2030 2040 2050 5 0 Source: United Nations. Copyright (C) Mitsubishi Research Institute, Inc. 20

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