Japan Business Forecast Report Q4 2012

Japan Business Forecast Report Q4 2012 - new country guide report published
2013-01-01 00:43:55 - Japan Business Forecast Report Q4 2012 - a new country guide report on

Despite posting strong Q112 GDP growth of 2.8% year-on-year (y-o-y) annualised, we still expect the Japanese economy to come under threat as volatility in the external environment translates to swings in domestic economic activity. A recent Tankan survey and other economic indicators point to a lack of improvement in the economy.

We have maintained our forecasts for growth to come in



at 1.4% for 2012. Although the lower house´s approval of a sales tax hike provides some reason to be optimistic about Japan´s ability to gather political will, the new measures remain insufficient to prevent the country from heading towards fiscal crisis. We maintain our view that reform to much larger parts of the social security system are still needed, and that this will be costly for politicians who attempt to implement these changes. The massive changes in Japan´s current account dynamics continue to push the country´s current account balance towards zero and into the red in 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, and we forecast growth to come in at 4.5% y-o-y for 2012. 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 is likely to place significant downward pressure on Japan´s net international investment position, although a shift from positive to negative territory will very likely take more than 30 years. While post-earthquake reconstruction is expected to 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. We believe earthquake assistance will 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 2012 and 2013 forecasts for import and export growth as global economic activity has slowed. Problems in Japan´s major export markets are structural rather than cyclical and point to a much slower recovery for Japan´s export demand. As such, we have revised down our export forecast and expect export growth to come in at 4.5% y-o-y in 2012 and 3.0% y-o-y in 2013. We also expect import growth to rebound less quickly,coming in at 5.0% yo- y in 2013. These changes have led us to revise down our full-year GDP forecast for 2013 to 1.2%.

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 that will very likely be needed to fund reconstruction efforts. 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. While unconventional quantitative easing, including the purchase of risk assets such as exchange-traded funds and real estate investment trusts, may help to 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.

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