Japan economic outlook FY02~04
Summary: Japans economy is at the mercy of exports
February 24, 2003
Nomura Research Institute, Ltd.
Economic Research Department
The Japanese economy has clearly changed gearfor example, industrial output has fallen for four months in a row since September 2002. GDP continued to grow on a real basis in October~December 2002, up by 0.5% quarter on quarter (according to the first preliminary report), but this represents a marked slowdown from 1.3% growth in April~June and 0.7% growth in July~September. The slowdown in export growth last summer led manufacturers to reduce production, and this in turn has resulted in a slowdown in domestic demand.
We believe that real GDP growth could actually be negative in the first quarter of 2003, for the first time in five quarters. However, it is too early to judge whether or not this would mark the beginning of a full-fledged recession similar to those seen in the past. We think that the Japanese economy has undergone a substantial change in structure, as a result of which the economy as a whole, and domestic demand, are highly sensitive to exports and are likely to move both up and down repeatedly in short-term cycles.
Japanese companies have aggressively cut down their inventories in response to continuing deflation, and as a result of this the domestic economic/inventory cycle has steadily weakened. At the same time, the fortunes of the US and Asian economies, Japans main export markets, are now more closely linked, and this too is making Japanese exports more volatile. These two structural changes are creating short-term economic fluctuations in Japan.
Real exports (GDP basis), which hold the key to Japans economic prospects, have accelerated once again, growing 0.1% quarter on quarter in July~September 2002 and 4.5% quarter on quarter in October~December 2002. However, judging from the level of growth seen in Japans export markets, we believe that this recent rapid growth in exports, which on an annualized basis is close to 20%, is likely to be only temporary. We expect export growth to slow down in the first half of this year and exert negative pressure on both manufacturing industry output and domestic demand. The environment for exports, mainly to the US, should stabilize once again around the middle of this year, and there is now unlikely to be a clear recovery in the Japanese economy until the second half of FY03.
In view of the unfavorable economic environment, further monetary easing seems inevitable. However, this will probably be no more than an extension of the existing quantitative easing measures, and is unlikely to have a marked impact on the economy.
We expect real GDP growth to drop substantially from 1.5% in FY02 to -0.1% in FY03. However, we expect to see a gradual recovery in FY04, with real GDP growth of 0.5%.
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