2012-11-15 19:50:52 - Japan Business Forecast Report Q1 2013 - a new country guide report on companiesandmarkets.com
The Cabinet office of Japan revised down its estimate of growth in Q212 to an annualised rate of 0.45% quarter-on-quarter (q-o-q), in line with our expectations for the Japanese economy to cool as volatility in the external environment adversely hits domestic economic activity levels. A September Tankan survey and other economic indicators suggest that businesses are likely to see conditions deteriorate, which bodes poorly for private investment growth. We believe growth is likely to slow further in 2013, to come in at a subdued 1.2% and highlight the growing risks of recession.
Even with the election of new party chiefs in the ruling Democratic Party of Japan (DPJ) and opposition Liberal Democratic Party (LDP), we believe the political impasse will remain,
as the opposition parties continue to push Prime Minister Yoshihiko Noda to call for an early dissolution of the House of Representatives. Our core view is for the LDP to win the largest number of the seats in the lower house, but fail to secure a majority, and thus need to seek more partners to form a coalition to rule. As such, we expect the current policy gridlock to remain, which could present downside risks to our forecast.
The massive changes in Japan´s current account dynamics continue to push the country´s current account balance towards zero and into the red beyond 2017. We maintain our expectations for import growth to slow as the power situation in Japan stabilises. However, the deterioration in major export markets has led us to downgrade Japan´s export outlook for 2013, expecting nominal growth to come in around 1.0%.
Long-term household savings rates will continue to decline as a progressively ageing society and a shift towards lower-paying contract (non-regular) employment forces more Japanese households to consume a greater proportion of their income. Consequently, this should place significant downward pressure on Japan´s net international investment position, although a shift from positive to negative territory should take more than 30 years.
While post-earthquake reconstruction should result in higher loan demand in the short term, we believe the longer-term impact will be muted as the Japanese economic expansion remains anaemic.
Moreover, we believe earthquake assistance should result in further increases in lenders´ bond holdings, leading to greater industry exposure to mounting public debt risks.
Major Forecast Changes
We have lowered our 2013 forecasts for import and export growth as global economic activity slow furthers on the back of Japan´s neighbours posting weaker economic indicators. However, we have revised up our estimates for growth of the net income account to decline more slowly over 2012/13, as recent data releases from the Ministry of Finance posted a surge in investment inflows.
Given the political gridlock that is likely to persist even with the installation of a new government, we have revised down our longterm growth outlook for public investment and consumption. This is mainly driven by our expectations for growth in debt issuance to slow as the government struggles to gather consensus on fiscal policy, resulting in a delay and cutback in expenditures at the central and local government levels.
Key Risks To Outlook
The main risk to Japan´s economy comes from a fiscal crisis that could result from the increase in debt issuance as its welfare expenditures increase. While the bond markets remain underpinned for now, the possibility of a failed bond auction cannot be discounted given the huge debt burden of the central government.
Another major risk to our economic outlook comes from another collapse in external demand as was seen in the height of the global financial crisis. This would come at the worst possible time for the economy, which is currently suffering from negative domestic demand growth and political gridlock which has stalled fiscal policy.
While unconventional quantitative easing, including the purchase of risk assets such as exchange-traded funds and real estate investment trusts may help stem deflation over the next few quarters or even years, the risk of a sudden onset of hyperinflation over the longer term has increased considerably as the government remains eager for the Bank of Japan to reignite inflation through the further expansions easing measures.
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