Fiscal 2012-13 outlook for the Japanese economy: The domestic demand-led recovery continues
— Growth potential weak, but effects of policy measures will provide a boost —
June 28, 2012
The Japanese economy as a whole is recovering. The driving force behind the recovery has been reconstruction demand in the wake of the Great East Japan Earthquake and the boost to domestic demand from government policies such as support measures for the purchase of eco-cars. The contribution of external demand to growth has been limited. The recovery is not yet self-sustaining and there is still much uncertainty due to both internal and external factors, such as electricity shortages and growing concern over the European debt problem. The key points in any forecast for the future are the risk of a slowdown in foreign demand, the economic pulling power of government policy effects and the ability of domestic demand to achieve a self-sustaining recovery.
With the US and Chinese economies expected to remain firm, the negative impact on Japan’s exports and production is likely to be limited. The European economy is expected to see negative growth up to the July-September quarter of 2012, but because Japan exports relatively little to the EU, the direct negative impact is likely to be slight. However, in the absence of a strong driving force, the pace of recovery of exports is likely to remain a gentle one. Meanwhile, imports of crude oil and liquid natural gas are likely to remain at a high level. Given these factors, there is little prospect of an increase in the economic pulling power of foreign demand.
Reconstruction demand and eco-car purchasing support measures continue to have a positive effect on domestic demand, but the policy effects will tail off and end within the year.
(1) Reconstruction demand
With restoration and reconstruction work in the disaster area in full swing, reconstruction demand is likely to boost the economy into the October-December quarter of 2012. However, in early 2013, the boosting effect is likely to tail off and public investment is likely to begin declining.
(2) The household sector
A sharp fall in automobile sales is expected when the budget for eco-car purchase subsidies runs out, and consumer spending is likely to fall in the October-December quarter of 201. Thereafter, although there will be a last-minute surge in demand for durable consumer goods and housing in the second half of fiscal 2013, ahead of the consumption tax rate increase, the economy is likely to see a sharp downturn in fiscal 2014 as demand falls in reaction.
(3) The corporate sector
Capital investment is likely to see a gentle rise as corporate earnings recover and reconstruction demand gathers momentum. However, in recent years, against the backdrop of a decline in Japan’s expected growth rate and efforts to attract strong foreign demand, companies have been reluctant to invest in Japan.
Thus, the emergence of full-scale reconstruction demand and a rise in consumer spending thanks to eco-car purchase support measures will boost the economy, but as the effect of these measures tails off, and capital investment continues to stagnate, the rate of growth of the Japanese economy is likely to slow into the first half of fiscal 2013. In the second half of fiscal 2013, a surge in demand ahead of the consumption tax rate rise is likely to bring faster growth. It is likely that the growth rate will be in the 2-2.5% range for fiscal 2012, and in the mid-1-2% range for fiscal 2013.