Japan economic outlook FY02~03
Summary: Maintaining weak recovery track
September 6, 2002
Nomura Research Institute, Ltd.
Economic Research Department
Boosted by rapid export growth, the domestic economy has been in recovery mode since the start of the year. The US economic slowdown has already begun to dampen the export climate, however, and this has cast renewed uncertainty over the direction of Japan's economy. We believe that, besides exports, the key to the economy going for-ward is the domestic spending of income earned from the rapid increase in net exports.
Although we see a future slowdown in export growth as inevitable, we do not think thatexports will weaken substantially, since: (1) the US should avoid a double-dip recession; (2) US imports should increase as companies restore inventories; (3) US demand for autos, a key Japanese export, remains solid; and (4) demand from elsewhere in Asia is stable.
Domestic consumer spending has been surprisingly stable since January, as confidence has improved. In view of the further time needed before employment and incomes begin to improve, however, the risk of a downturn in consumer spending persists for the time being. Although the economic recovery has favorably impacted the job market via increased overtime hours and new hiring, companies are still under intense pressure to reduce labor costs.
We are forecasting real GDP growth of -0.1% in FY02 and +0.5% in FY03, assuming that the US economy recovers slowly and there is no further strengthening in the yen. With exports increasing, albeit gently, we expect the downturn in private-sector domestic demand to come to an end in the second half of FY02. However, the subsequent recovery is likely to be a limited one, and because the government is pursuing deflationary fiscal policies, we see a very good chance that growth will remain low.
With employee incomes slow to improve, income transfers from overseas are likely to buildup in the corporate sector, primarily at manufacturers and large companies. We anticipate that a portion of these funds will be directed into business investments, prompting a capex-led recovery in domestic demand. Leading indicators suggest that this is already occurring, and we think demand for IT-related infrastructure has the potential to support recovery on a broader scale. Nevertheless, the persistent strong pressure to cut excessive debt is likely to limit the pace of this capex recovery relative to past cyclical upturns.
Capital spending is gradually replacing external demand as the driving force behind the economy, in our view, and we thus expect the current economic recovery to outlast the end of the rapid export growth phase and endure well into next year. Nevertheless, companies are still under intense pressure to make structural adjustments and the government's sustained fiscal belt-tightening will also likely take its toll. We therefore expect economic recovery to display very limited strength. With the underlying growth rate appearing unlikely to match the potential growth rate in the short term, which we estimate to be approximately 1%, the prospect of a full-fledged economic recovery remains dim. Both monetary and fiscal policy also appear unlikely to have any effect but maintain the status quo within the current economic environment.
We estimate real GDP growth of +0.2% in FY02 and +0.6% in FY03. In light of such low growth conditions, we do not expect the downward trend in the inflation rate to abate. We project nominal GDP growth of -1.4% in FY02 and -0.6% in FY03, which would mean four consecutive years of negative growth.
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