Japanese economic outlook FY01~FY03
Summary: Cyclical recovery, but government deficient in policy making
March 13, 2002
Nomura Research Institute, Ltd.
Economic Research Department
We see growing signs of economic recovery. The downtrend in exports has tapered off. Inventory liquidation is proceeding apace, led by the IT sector. January-March could turn out to be the first quarter of quarter-on-quarter growth in industrial production in five quarters. Shipments of IT goods have started to rise in Japan as well as the US. Although Japan's economy will likely remain mired in the doldrums through mid-2002 given the continued decline in domestic private demand, we believe it is now putting in a major bottom.
This summer, we look for an export-driven cyclical recovery to commence as rising exports fuel growth in industrial production against a backdrop of US economic recovery. We also expect an upturn in corporate profits in the second half of FY02, when the downtrend in private demand should cease as well. For FY02, we project real GDP growth of -0.6%. On a semiannual basis, we project annualized period-on-period growth of -0.4% in the first half, +0.2% in the second half.
Anemic growth will very likely continue in FY03. We project FY03 real GDP growth of +0.5%. In the post-bubble era, growth in corporate cash flow no longer translates into growth in capex, in our view. Moreover, we think improvement in employment and incomes will be limited, dampening the recovery in consumer spending. We see little prospect of a smooth transition from a US-dependent, export-led recovery to a self-sustaining recovery driven by private domestic demand.
The recently unveiled anti-deflation package lacks concreteness, in our view. Moreover, we think it contains nothing new in terms of addressing the NPL problem. Even if public funds are injected into the banking system in FY02, the program will most likely be a limited infusion of funds into troubled banks or an across-the-board, preventive infusion. Such a measure is unlikely to restore confidence in the financial system.
Although the government has switched from bottom-up policymaking led by bureaucrats to a top-down approach spearheaded by the Cabinet or CEFP, this approach is not functioning in practice. In our opinion, the Koizumi administration has yet to succeed in crafting effective policy. We believe this deficiency could cloud the prospects for tax reform, a key priority of the Koizumi administration in the first half of 2002.
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