Fiscal 2011-12 Outlook
Growth remains slow for the Japanese economy

　Having slumped in the aftermath of the Great East Japan Earthquake, the Japanese economy recovered rapidly from the spring onwards, supported by restoration and reconstruction work. However, since the summer, a deceleration of mining and industrial production has become apparent. The major reason is that while domestic demand shows underlying strength, exports to Asian countries have begun to soften. For the foreseeable future, the trend of external demand will be a key factor.
　With foreign economies continuing to slow down, export performance is expected to remain weak. Although the economies of the US and some newly developing countries show underlying strength, and no major slump among foreign economies is expected, (i) the deepening European financial crisis, (ii) the loss of momentum of the Chinese economy, (iii) the prolonged floods in Thailand and other risk factors mean that continued vigilance is required.
　A decline in competitiveness due to the strength of the yen has also been exerting downward pressure on Japan’s exports. The decline in competitiveness has been particularly severe vis-à-vis Korea, which exports many of the same products as Japan. The share commanded by Japanese products in the US and Chinese markets has also fallen sharply.
　Japan’s exports are likely to stay much slower as a result of the slowdown in foreign economies and the strength of the yen.
　Meanwhile, domestic demand, although unlikely to be strong, is expected to see a gentle recovery.
(i) Reconstruction demand
　As the rubble of the earthquake is cleared, private-sector construction and housing starts are gathering momentum. In early 2012, the boost they give to the economy is likely to increase.
(ii) The household sector
　Income conditions are holding steady overall. Improved consumer confidence makes it likely that consumer spending, which fell sharply after the earthquake, will gradually move towards recovery. However, it is possible that automobile sales will begin to soften in early fiscal 2012. The increased burden on households also means the recovery in consumer spending will be a gentle one.
(iii) The corporate sector
　As corporate earnings recover and the sense of overcapacity recedes, capital investment is expected to see gentle growth. However, the level of capital investment is highly likely to remain well below that recorded prior to the Lehman Shock, for a prolonged period. This will occur against the backdrop of the transfer of production overseas. The strength of the yen, among other factors, has made business conditions in Japan harsher, and exports are becoming unprofitable.
　Thus, against the backdrop of a decline in the pulling power of external demand and the transfer of production bases overseas, growth in the sector is likely to remain slow up to the end of fiscal 2012. However, owing to the underlying strength among the economies of the newly developing countries, the emergence of reconstruction demand and a recovery in consumer spending, among other factors, it will be possible to avoid an economic slump. Economic growth is expected to be in the 0-1% range for fiscal 2011, and around 2% for fiscal 2012.