A Revised Economic Forecast for Fiscal 2004-2005
November 16, 2004
Japan Enters an Adjustment Phase as Real GDP Growth Slows to a Virtual Standstill
In the July-September quarter, economic growth came to a virtual standstill, real GDP rising by only 0.1% on the previous quarter (equivalent to an annualized increase of 0.3%) due largely to the beginnings of a decline in capital investment and exports began to fall, while consumer spending has remained firm.
(1) Household sector: With employee remuneration bottoming out and consumer confidence recovering, consumer spending continued to grow at an annualized rate of more than 3%. Sales of digital consumer electronics prior to the Olympic Games and demand stimulated by the summer heat wave appear to have had a positive impact on spending. However, given the negative factors of reduced motivation to go out in August through September, due to the broadcasting of the Olympics and the lingering summer heat, and the poor results of this year's autumn goods sales offensive, it is possible that the trend of consumer spending was in fact more robust than the figures suggest. Thanks to a sharp rise in construction starts on own homes in what is thought to be a demand rush prompted by the forthcoming rise in interest rates, housing investment saw a slight rise for the third quarter in succession.
(2) Capital investment: Capital investment fell for the first time in four quarters Investment in software investment declined and the unseasonably hot weather appears to have led to a softening of construction investment. Owing to the rise in the price of construction-related materials, in some respects the amount of investment fell on a real basis. However, as shipments of capital goods, machinery orders and capital investment plans recorded by the Bank of Japan's Short-Term Economic Survey ("Tankan"), all indicate that capital investment is still rising, it seems fair to conclude that the upward trend of capital investment has not been disrupted.
(3) Net exports: Net exports fell on the previous quarter for the first time in eight quarters, as the result of a weakening of exports of automobiles to the United States and ships to the EU, which caused export growth to slow, and continued growth of imports due to a rise in service payments in areas such as overseas travel.
The downward trend of the GDP deflator slowed sharply to -2.1% on the same quarter in 2003. Among other factors, this may be attributed to (i) the rise in construction material prices, (ii) the rise in goods on hand prices, (iii) the slowing of the rate of increase in the price of crude oil, and (iv) the bottoming out of civil servant salaries.
Outlook: Japanese Economy Set to See a Temporary Adjustment Phase Lasting Through First Half of 2005
The low rate of growth experienced for two consecutive quarters (April-June and July-September 2004) suggest that the adjustment phase previously forecast for the first half of 2005 has manifested itself ahead of time. The slowing of the downward trend of the GDP deflator, due among other things to the rise in materials prices, and the restriction of the economy's capacity for recovery on a real basis has been a major factor. Accordingly, the present phase of the economy would best be described not as a "recession phase", but rather as a "temporary adjustment phase within a recovery trend", of the kind experienced in the second half of fiscal 2002.
Looking ahead to the second half of fiscal 2004, although the economy will continue to slow, largely due to the slower growth of exports and industrial production, it is likely to be spared the kind of near-zero growth experienced in the July-September quarter, and continue to move back into positive growth, albeit at a slow pace. The key factor will be the trend of capital investment, which effectively saw almost no growth in the first half of fiscal 2004, but given that (i) other capital investment-related indicators suggest that capital investment will continue to rise and (ii) it is possible that more companies are putting off their capital investment plans as they did in the July-September quarter of 2003 (the balance of machinery orders continues to rise), it seems fair to conclude that the recovery in capital investment has not been disrupted. Not only is there a possibility that capital investment will see an upward adjustment after the second preliminary estimates, but capital investment is also set to continue to rise at a gentle pace in the October-December quarter of 2004 and the January-March quarter of 2005.
Looking ahead to fiscal 2005, the first half of the fiscal year is likely to see the adjustment phase continue against the backdrop of (i) production adjustments, especially in electronic devices, and a consequent weakening of production-related capital investment and (ii) a fall in the economic pulling power of consumer spending owing to the increased burden on households.
However, given that (i) exports are likely to see continued growth owing to the continued growth of the Chinese economy, and (ii) thanks to progress with restructuring programs, etc., the corporate sector is now on a firmer footing, the economy is likely to avoid a serious slump. The current adjustment phase will come to an end in mid-2005 and, from the second half of the fiscal year, the economy is likely to show signs of a recovery led by the corporate sector.
As compared with our previous forecast (issued on September 14), the forecast level of real GDP for fiscal 2004 has undergone a slight downward revision of 0.8 percentage points. The forecast of real GDP for fiscal 2005 takes account of the recovery expected for the second half of the fiscal year and is therefore unchanged.
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Hideki Matsumura / Hisashi Yamada