Japan: Slower recovery in 2012

FRIDAY 13 JANUARY 2012

The Japanese economy is still recovering, but due to historical revisions the 2011 GDP growth forecast has been cut to -0.7 per cent from -0.3 per cent. Leading indicators are suggesting above-trend growth over the next six-months and we are still relatively optimistic on the nearterm growth prospects. Reconstruction work will provide support; a third supplementary budget was approved in late November and the government has set aside 19 trillion yen (4 per cent of GDP) for rebuilding Japan over five years. Reconstruction spending will start to kick in early in 2012. The general government balance, as a percentage of GDP, is expected to widen to 11 per cent in 2012-13. The Government is planning for a consumption tax hike, but our understanding is that it will not materialize before April 2014. But if consumption is frontloaded as a result, activity in 2013 may be affected nevertheless. Meanwhile the yen appreciation is hurting the export sector (exports absolutely plunged in November and December and the year-over-year trend is running at -4.7 per cent). Consequently, we have sliced a few tenths off of the 2012 GDP forecast. Real GDP will grow 1.7 per cent and 1.2 per cent in 2012 and 2013, respectively. The consensus forecast is on a slippery slope too, and is currently at 1.9 percent for 2012 and 1.4 percent for 2013, respectively. But it is not all about exports; over the last few months most economic data has surprised to the downside as illustrated by the Economic Surprise Index. For example, retail sales have plunged and consumer confidence indicators have weakened further as well. By contrast, PMI in the manufacturing sector edged higher in December and is now hugging the 50-level. The unemployment rate has drifted higher again, and was sitting at 4.5 per cent in November. In September the unemployment rate was 4.1 per cent. According to our forecast, the unemployment rate will hold steady at its current level in 2012-13. Core inflation is below zero again in year-over-year terms and it will probably not move back into positive territory until this summer. We do not forecast any BOJ rate hikes in 2012-13. As always, there are risks on both sides. The crisis in the Euro zone could spin out of control thus leading to a deeper recession than we currently forecast. On the other hand it is possible that we underestimate the positive effects from spending on reconstruction. Mattias Brur, SEB Economic Research, +46 8 763 85 06
Key data Percentage change

2010 2011 2012 2013 GDP* Unemployment** Inflation* Government deficit**

Source: SEB

4.4 5.1 -0.7

-0.7 4.5 -0.2

1.7 4.5 0.0

1.2 4.4 0.2

-9.3 -10.3

-11.1 -11.0

* Percentage change, ** Per cent of labour force, *** Per cent of GDP

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