Outlook for the Kansai Economy in 2010-11
— Serving as an anchor in the midst of the recession —
December 16, 2010
The economy of the Kansai region* leveled off in the summer of 2010. Local demand has been insufficient to drive economy forwards and exports have peaked.
In the business sector, the Lehman Shock triggered a downward shift in levels of capital investment and earnings. Against the backdrop of a strengthening yen, internal capital investment has lacked vigor. On the earnings side, the break-even point remains high and further restructuring is necessary.
In the household sector, income and employment conditions have improved but at a slow pace. As compared with the situation prior to the Lehman Shock, non-scheduled working hours in manufacturing industry is still short and companies are now able to accommodate industrial production growth by increasing non-scheduled working hours.
Exports are set to peak early in 2010, due largely to the benefits of overseas economic stimulus measures tailing off.
Under these conditions, production activity started to weaken in the last summer.
A comparison of the Kansai economy with that of Japan as a whole reveals that the economic indicators for the Kansai are slightly better than average.
Regarding the outlook for the conditions facing the Kansai economy, the European and US economies are expected to slow through the end of 2010 and into 2011. The emerging and developing countries are set to see relatively high growth continue but, in the short term, the tailing off of the benefits of economic stimulus measures in those countries, among other factors, means that the Kansai region’s exports may remain sluggish.
In Japan, a reaction is expected following the end of the Eco Car subsidy and the Eco Point system for consumer appliances, and the switch to terrestrial digital broadcasting. Meanwhile, the impact of the economic stimulus measures put forward since the autumn of 2010 will be limited.
The continued supply-demand gap of 3% on a nationwide basis means that the deflationary trend will be prolonged.
Under these conditions, the key issue in FY2011 will be how well the Kansai economy get profit form the increasingly vigorous growth of the Asian economies.
An analysis of the structure of the Kansai region’s trade reveals that it is very different from those of the Kanto** and Chubu*** regions and that the Kansai’s surplus is feasible to rise as the volume of trade transactions rises.
The Kanto region has had a trade deficit (on a customs-cleared basis) since 2001. The region is losing its competitiveness in electrical machinery, scientific & optical instruments, etc. and has been unable to offset the impact of the rise in the price of oil.
The Chubu region has maintained a larger trade surplus than other regions of Japan, but is heavily dependent on transportation machinery.
The Kansai region has managed to achieve a stable trade surplus with little bias towards any particular items. In addition to electrical machinery and scientific & optical instruments, it performs well in general machinery and basic materials.
The movements of the Kansai’s trade-weighted nominal effective exchange rates have, so far, followed the national average, so that the Kansai region will not suffer the impact of the strong yen especially strongly.
Mining and manufacturing output in the Kansai region is also holding firm. Production not only of consumer durables, which tend to benefit the most from policy measures, but also of non-durable consumer goods and investment goods are still growing. Although production of intermediate goods are softening, the scale of inventory accumulation is small and production may begin to grow once again as exports recover.
The Kansai region is not heavily dependent on the production of TV sets and the impact of the reaction is also likely to be on a par with that experienced nationwide.
Under these conditions, while the Kansai, like the rest of Japan, is highly likely to slip into a recessionary phase in the short term due to the peaking of exports, the reaction after the boost provided by stimulus measures and the weakness of the self-sustaining recovery in internal demand, it is also likely to achieve a steadier performance than other regions of Japan. In the second half of fiscal 2011, as exports to the emerging and developing countries rise, the economy of the Kansai region is likely to recover faster than those of other regions. It is expected to achieve a real growth rate of 0.9% for FY 2011, as compared with 0.3% for Japan as a whole.
In the long term, it is essential that the structure where employment does not grow even if the economy does should be resolved. In addition to investment in R&D and new business incubation measures, the Kansai should also take steps to attract foreign investors.
*Osaka,Kyoto,Kobe,Nara and Wakayama are the big cities of Kansai region.
**Tokyo and Yokohama are representative cities in Kanto
***Nagota and Toyota are located in Chubu
For more information on the content of this report, please contact Shigeo Hirose, the Japan Research Institute, Limited.