Economic Forecast for FY 2009-2010
Japanese Economy Continues to Stagnate
- Recovery likely to be delayed until end of 2010 -
June 18, 2009
Since March, the Japanese economy has been showing signs of rallying, especially in the manufacturing sector. However, there is as yet no sign of a self-sustaining recovery in final demand and the rally is largely due to temporary factors such as (i) the end of the inventory adjustment cycle and (ii) the government's introduction of economic stimulus measures. The economic outlook, both in Japan and overseas, remains uncertain.
The Chinese economy is expected to maintain its steady growth, thanks to vigorous stimulus measures. However, while China's economic growth has been driven by investment in fixed assets, the driving force behind Japanese exports is components and capital goods for manufacturing industry and China's economic stimulus package will be of limited benefit to the Japanese economy. Chinese exports to Europe and the United States must grow before Japan's exports to China can recover.
The stagnation of the US economy is likely to continue. The housing market, household balance sheet adjustments, bad debts in the financial sector, among other factors, will hamper recovery. Increased issuance of government bonds will increase the pressure for a rise in interest rates. The risk of a further economic downturn remains.
Three kinds of pressure for adjustment are affecting Japan's economy: (i) deflationary pressure, (ii) pressure for capital stock adjustments and (iii) pressure for personnel cost adjustments.
(i) Deflationary pressure
In recent months the GDP gap has widened to more than –8%. The major shortfall in demand has encouraged price competition and the downward trend of consumer prices has become clear. The deflationary trend is likely to be prolonged: the GDP gap is unlikely to be closed before 2015 at the earliest, and until then the pressure for prices to fall will remain strong.
(ii) Pressure for capital stock adjustments
The perception of overcapacity in the manufacturing sector is at its highest ever level. Even if companies hold back on investment in new equipment and discard existing equipment, eliminating the perception of overcapacity is likely to take at least 2 years. Consequently, the present stagnation in capital investment is highly likely to be prolonged.
(iii) Pressure for personnel cost adjustments
The labor share is at its highest ever level, and the drive to cut personnel costs is likely to gather momentum. Fears of a labor shortage in the medium-to-long term mean that serious job cuts are likely to be avoided, but the pressure to reduce wages, especially bonus payments, is likely to strengthen.
The capacity for self-sustaining recovery in internal demand being limited, basically, the Japanese economy will remain dependent on external demand. Economic stimulus measures should have a positive impact in the short term but will not be enough to ensure a full-scale recovery. Ultimately, the Japanese economy is not likely to begin to recover until the structural adjustments in the US housing, consumer and financial sectors are completed.
Given these conditions, although the Japanese economy is likely to see some positive growth in the short term, the stagnation of internal and external demand means that it is highly likely to return to zero growth from the second half of fiscal 2009. The recovery is likely to come after the end of 2010. Real GDP growth is expected to be –3.5% in fiscal 2009 and +0.3% in fiscal 2010.
Other factors that could cause an economic downturn include (i) a deceleration of the US economy, (ii) a rise in the price of crude oil, (iii) a strengthening of the yen, (iv) swine flu. There is still a possibility that the Japanese economy will see a further downturn.
For more information on the content of this report, please contact Hideki Matsumura, the Japan Research Institute, Limited.