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Economic Outlook - Japan

15 July 2010

Please direct inquiries, if any, to:

Peter Skøttegaard Øemig, Senior Macroeconomic Analyst
+45 8989 2550
Summary - Japan
• Growth has been a pleasant surprise
– Growth in Japan has increased significantly again following the recession that ended
in the second quarter of 2009. Exports, stock adjustment and strong private
consumption via fiscal-policy stimulus have boosted the economy. Small signs
even indicate that the recovery is about to spread to investment growth and ’real’ private consumption.
– We raise our growth estimates for 2010 and 2011 to 3.3%
3 3% and 1.9%,
1 9% respectively.

• Unwinding temporary stimulus

– The temporary stimulus measures are about to fade away. Exports are still expected to be supported by
solid g
growth in the remaining
g Asia but are under pressure
p from the weaker euro and slower growth
g in
the euro zone.
– We expect that growth will be supported by investment in the second half of the year.

• The labour market is improving slightly

– Unemployment has declined since it peaked, the number of job postings has increased, the job-per-
applicant ratio is growing, etc. Wage increases have changed from a negative to a positive figure. It
remains to be seen, whether the improvement is solid enough to boost private consumption, but there
are small such indications.

• Deflation for some time yet

– There are still many idle resources in the economy, and this will continue to put a downward pressure
on prices. The pressure will abate gradually, but we do not expect positive inflation until late 2011.
Consequently interest
Consequently, interest-rate
rate hikes will not be on the agenda until 2012 at the earliest.

• Political reforms are uncertain

– The newly-inaugurated (June) Prime Minister Naoto Kan had announced that he would do an effort to
deliver a surplus on the public finances in the course of a ten
year period and that he would take
measures to increase the consumption tax and reduce corporate taxes, etc. In the election for the upper
house on 11 July, the government lost its majority in the house, which may make it difficult to
implement reforms although the government still has the majority in the more powerful lower house.
Strong recovery
• The expansionary fiscal policy and exports pulled the economy out
of recession, and since the second quarter of 2009, the recovery
has been quite solid.
• We expect GDP to increase by 3.3% and 1.9% in 2010 and 2011, respectively.

Japan: GDP growth

106 106

104 104

102 102

100 100
Index 100 = 22008:1

Dotted line is Jyske Bank forecast

98 98

96 96

94 94

92 92

90 90

88 88
04 05 06 07 08 09 10 11
Exports increase strongly
• Following the sharp decline in exports in late 2008 and early 2009,
exports to Asia and China in particular have recovered much of
the ground lost.
• We expect that
h exports willll go on increasing d driven b
by the
h recovery in Asia b
at a lower rate. The export sector will still be important for the Japanese
Sharp increase in industrial production
• The
h industrial
d l production
d h
has increased
d markedly
k dl since earlyl 2009,
but it is still somewhat lower than the pre-crisis level.
• Industrial sales have outgrown production for a long time, which has caused a
significant decline in stocks.
stocks This is not sustainable in the long term,
term and since
the important stock-to-sales ratio has normalised, the positive effect from
stocks is fading away.
• We expect the industrial production to increase more moderately from the
current level.
Strong growth in private
consumption expected to moderate
• Private consumption has increased markedly in recent quarters
supported by various government initiatives.
• p g, but on a small scale yet,
The labour market is improving, y , and we do not
expect to see a sharp increase in employment.
• Wage increases have just reached positive territory, so real wage growth is
not negative any longer.
The labour market is improving
• Unemployment has fallen since it peaked - although it has increased
again in the past two months.
• The number of job postings has increased and the job-per-applicant ratio is
g o ing etc.
growing, etc In addition,
addition wage
age inc
eases have
ha e changed from
f om a negative
negati e to a
positive figure. This will usually support private consumption, but it is still highly
uncertain whether the improvement will be solid enough to lift private consumption.
• There is a risk of a very
y slow improvement
p in employment,
p y , because employment
p y
has fallen much less than has production. Hence, the risk of a jobless recovery is
great, which increases the risk that private consumption will not contribute much to
the recovery.
Record-low investment rate
• Investment has pulled down GDP significantly. However, after
the investment rate has fallen to a record-low level, there are
signs now that businesses have slowly started to increase investments.
• We expect that investment will start to pick up in the second half of 2010.
Deflation is here to stay
• Due to the deep recession, there are still many idle resources in
the economy, which will put a downward pressure on prices.
• The pressure will abate gradually, but we do not expect positive inflation until late
• Since the Bank of Japan will not start to normalise the monetary policy until the
period of deflation is over, interest rates will not be raised until 2012 at the

Nikkei 225 index

y/y, percent


The public purse is suffering
• The deep recession has squeezed the public finances further. For
the period ahead, demographic factors will cause the prospects to
deteriorate further, because the total population in 2050 will have fallen
by one third while the number of elderly citizens will have increased.
• The process of restoring the public finances will put a damper on the
growth prospects.

Japan: Population Forecast until 2050





mber of persons 1000

1.000 bn. yen

% of GDP




1905 1920 1935 1950 1965 1980 1995 2010 2025 2040

Population development Population forecast

Source: Reuters EcoWin
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