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News Release

Outlook for the Japanese Economy in 2011-12:
Rapid recovery from the earthquake and tsunami

June 27, 2011

Overview

The Japanese economy suffered a sharp slump following the Great East Japan Earthquake, owing to a fall in mining and manufacturing output caused by the severing of supply chains, and to deterioration in consumer confidence. However, signs of recovery emerged during the second half of April.

The key factors to be considered in predicting the future trend of the economy are mining and manufacturing output, the degree to which consumer confidence recovers, public investment and the demand for regeneration (investment in housing, etc.).
(1) Mining and manufacturing output
Progress in the reconstruction of factories, centering on the automobile industry has been faster than expected and mining and manufacturing output is expected to recover to pre-earthquake levels by the end of the year at latest. As Japan’s domestic output rises, against a backdrop of steady growth from developing economies, exports are also expected to return to an upward trend.
(2) Consumer spending
Consumer confidence is recovering at a gentle pace. The recovery of production in the corporate sector is also keeping income conditions steady overall. With the emergence of postponed consumer demand and demand for durable goods for regeneration work also expected, the upward trend in consumer spending is set to become more evident.
(3) Government spending
Public investment and government consumption are set to rise significantly. Although the delay in compiling a supplementary budget means this rise may be slightly delayed, the scale of the damage caused by the earthquake and tsunami means that as much as ¥5 trillion in public investment may be required over the next 3 years.
(4) Housing investment
As the preparation of land for building will take time, investment will take longer to materialize than after the Great Hanshin-Awaji Earthquake, but from early 2012 housing construction is likely to see a gradual recovery.

The emergence of the above signs of recovery and reconstruction means that from this summer, the Japanese economy is likely to maintain a rapid rate of growth. However, if downward pressure from the following factors strengthens, it is also possible that the pace of recovery may be slower than expected.
(1) The decline in household incomes and purchasing power
Securing funding for regeneration work may increase the burden on the household sector. In the short term, a fall in employee compensation due to the reduction of public employee wages and downward pressure on disposable incomes due to child allowance cuts will be the greatest risk factors.
(2) The rise in the price of natural resources
A rise in the CPI is causing household purchasing power to decline, and rising costs are exerting downward pressure on corporate earnings. It is also possible that the balance of trade deficit will be prolonged.
(3) The electrical power shortage
There is major concern that the shortage of electricity will become a nationwide problem if it proves impossible to restart nuclear power stations around the country. This would impact on corporate sector activity and could also have a negative influence on household sector consumption.

Unless these risk factors materialize to a significant degree, the Japanese economy is set for a “V-curve” recovery, with prolonged and fairly rapid growth, from the third quarter of 2011. On a fiscal year basis, although fiscal 2011 is set to see virtually zero growth, fiscal 2012 is likely to bring positive growth of around 3%.
Overall, while the earthquake and tsunami have caused a significant economic downturn, this is expected to be temporary and of short duration. However, concern over the emergence of fiscal risk in the medium term is likely to increase.

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