2012-02-09 13:46:19 - Recently published research from Business Monitor International, "Japan Business Forecast Report Q2 2012", is now available at Fast Market Research

Core Views T he Japanese economy registered its third consecutive quarter of decline, coming in at 0.5% q-o-q in Q211 from 0.9% in the preceding quarter as the country continues to suffer from the after-effects of the March 2011 earthquake. As a result, we maintain our view that the economy will contract by 0.7% for the whole of 2011. While reconstruction efforts will lead to a growth boom in late 2011 and 2012, the rebound should be relatively weak at 1.8% in 2012. Japan's current account dynamics are likely to change shape following the disaster, as exports suffer while imports stay elevated owing to the need to import higher levels of raw materials for reconstruction and power generation. As a

result, we believe the country will run a smaller current account surplus of 1.8% of GDP in 2011 (from 3.6% last year), owing largely to disruptions to the export sector. L ong-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. 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 long-term current account forecast substantially, averaging just -0.2% of GDP in the 2010s, compared with 0.6% previously. I n line with our view that repatriation of overseas investment funds will remain dominant, we have revised our forecast for the Japanese yen upwards to end the year at JPY72.50/US $ from JPY76.65/US $ previously. Our end-2012 projection for the currency is also JPY72.50/US $, unchanged from the preceding year. Key Risk To Outlook T he main risk to Japan's economy comes from a fiscal crisis that could result from the increase in debt issuance that will 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. A nother 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 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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