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Forecast for FY 2009-2010
Japan's Economy Continues to Stagnate
- Negative growth set to continue in the first half of 2010 -

December 9, 2009


Since the low of March 2009, the Japanese economy has enjoyed a gentle recovery. However, four factors suggest it is too early to claim that the recovery trend has been firmly established.
1) The recovery is being driven by economic stimulus measures in Japan and overseas, and the trend of the fundamentals is still downward.
2) The level of economic activity has only just recovered to about its lowest level during past recession phases and there is still a strong recessionary mood.
3) Largely as a result of the strength of the yen, Japan is performing least well among the world's leading economies. 4) Economic indicators suggest that the economic trend may peak or turn downward in the near future.

Looking overseas, with little prospect of resolution to structural issues such as the fall in commercial real estate prices, the non-performing loans problem facing US banks and the domestic balance sheet problem, the US economy is likely to see long-term stagnation. Meanwhile, the Chinese economy is growing at an increasing rate, on the strength of internal demand. However, because Japanese exports to China center on components and production equipment to be used by China in its role as "factory to the world" rather than to satisfy China's domestic demand, it would be unwise to place excessive expectations on exports to China as an engine of growth.
Furthermore, the negative impact of the rapid strengthening of the yen against foreign currencies in the wake of the collapse of Lehman Brothers is likely to be felt until the end of 2010, and export growth is highly likely to slow.

Japan's domestic economy is suffering from three kinds of pressure for adjustment.
1) Deflationary pressure
The GDP gap in the short term will remain around –6%. The large shortfall in demand means that price competition is likely to spread and the downward trend of consumer prices will to become prolonged. Corporate sales figures will fall still further.
2) Pressure for adjustment in capital investment
As the sentiment of over-capacity is hovering a historic high, the stagnation of capital investment is likely to be prolonged, especially in the manufacturing sector. A Cabinet Office survey likewise suggests that medium-term capital investment plans in manufacturing are likely to see a sharp downward revision.
3) Pressure for adjustment in personnel costs
Against the backdrop of a sharp rise in the sentiment of over-employment, the drive to reduce personnel costs is gathering momentum. The number of persons in employment could fall by a further 1.5 million over the next 12 months. The downward trend of remuneration, centering on bonuses, will also continue.

On the policy front, the effects of the last administration's stimulus measures are tailing off and from early 2010 will begin to exert downward pressure on the economic trend. This is particularly the case with public investment. The second half of fiscal 2010 is likely to bring a sharp downturn in automobile and flat-screen TV set sales. From early fiscal 2010, the measures introduced by the new administration will help to increase household income substantially and will underpin consumer spending. However, the need to fund these measures means that government spending will have to fall, and the net boost to the economy will be of limited scale. The boost to GDP is estimated at 0.3 points in fiscal 2010 and 0.2 points in fiscal 2011.

Given these conditions and against a backdrop of stagnating domestic demand and a decline in the pulling power of policy measures, it is likely that the economic trend will turn downwards once more in the first half of 2010. Although income support measures for households will bring Japan out of negative growth in the second half of the year, the recovery will be a weak one. Consequently, the growth rate for fiscal 2010 is expected to be –0.1%, representing a third consecutive year of negative growth.
If the deceleration of the US and European economies, the rising cost of natural resources, the appreciation of the yen and other negative pressures increase, there is a risk that the recessionary mood will strengthen.

For more information on the content of this report, please contact Hideki Matsumura, the Japan Research Institute, Limited.

Tel: 03-3288-4524

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