2013-02-22 13:41:26 - Fast Market Research recommends "Japan Business Forecast Report Q2 2013" from Business Monitor International, now available
The Liberal Democratic Party's (LDP) return to power has lifted optimism of many, as seen in the impressive climb of the country's equity indices. We do expect the aggressive policy action undertaken by both the government and the central bank to lift economic activity as businesses and households move their spending forward to take advantage of subsidies. That said, we do not believe that this uptick will last for the full year of 2013, and expect the economy to lose steam as the fiscal measures subside. As such, despite positive sentiment surrounding Japan's economy, we remain cautious and maintain a tepid growth forecast of 0.9% for 2013.
As a result of the aggressive fiscal stimulus packages (both supplementary budget and
budget for fiscal year 2013/14) that Prime Minister Shinzo Abe's administration plans to implement, we expect the growth of outstanding government debt to accelerate, as compared to the past three years of decline under the Democratic Party of Japan (DPJ). Despite this, we maintain our view that the government's stimulus only pushes the country closer to a fiscal crisis, and we expect any uptick in economic activity to be temporary, subsiding when the measures end.
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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. Moreover, we believe that exports will see a moderate recovery in 2013, and the trade deficit to narrow as a result of these positive dynamics. However, a possible escalation of territorial disputes with neighbouring China could once again plunge exports into the red and hamper the recovery of the trade account.
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.
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 raised our forecasts for government debt to grow by 4.7% in 2013, as it implements a JPY13.1trn supplementary budget and intends to compile a budget larger than the past few budgets under the DPJ. This change in forecasts does not change our long-held view that Japan continues to edge closer to a fiscal crisis, and even more so, now that the Abe administration is adamant on increasing fiscal stimulus which would increase bond sales at a time when demand for government debt is on a structural decline.
The outlook for exports has improved as improving global sentiment has lifted demand. The weakness in the Japanese yen, on the back of expectations of more monetary easing by the Bank of Japan, provides further upside pressure on export growth. Furthermore, with our expectations for the Chinese economy to remain on the upswing for the next two quarters, we believe that Japanese outbound goods are likely to record a modest recovery in 2013.
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 subdued domestic demand growth.
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 is determined to push the Bank of Japan to commit to indefinite easing and a 2.0% inflation target.
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