Geopolitical and fiscal pressure Country Risk Level AALOW M FFI
Overview Growth will be fairly low in 2013 (+0.3%) with a slight acceleration in 2014 (+0.8%). The Japanese economy entered in a technical recession in H2 2012, undermined by a decline in consumption following the withdrawal of subsidies for eco-friendly car purchases, the negative impact of Sino-Japanese geopolitical tensions on exports and a slump in demand from the eurozone. In 2013, growth should return to positive territory (+0.3%) on the back of increased public spending on previously deferred reconstruction projects in H1 following the 2011 earthquake. Private sector spending is expected to slow due to uncertainty overhanging the future. On the economic front, the weak outlook for exports to the eurozone and China will curb the investment drive. On the fiscal front, with the need for budgetary adjustment becoming urgent, a tightening is increasingly likely in the medium term.
Economic Outlook no. 1189-1190 |Macroeconomic, Risk and Insolvency Outlook
The government continues to have limited room for maneuver. The vic- tory for the conservative party (LDP) in the late-2012 general elections puts the issue of the Japanese government’s short- to medium-term fiscal policy back on the agenda, as the 2013 budget is still pending. Prime Minister Shinzo Abe has indicated his support for a stimulus package to the tune of JPY 200 trillion over 10 years, involving infra- structure spending, an increase in the Defense Ministry’s budget in order to safeguard Japanese interests, a reduc- tion in wage costs and a postponement of the hike in the VAT rate if deflation- ary pressures persist. In the short term, a policy of this magnitude can be expected to increase the public debt, which is already colossal (more than 200% of GDP in late 2012), and there- fore the risk on the sovereign debt. This would come on top of the already-high (geo) political risk emanating from tensions with China.
Monetary policy will remain expan- sionary. Key policy rates remain at lows and the asset purchase program was increased by JPY 21 trillion to JPY 101 trillion in Q4. This dovish policy is likely to remain in place in the medium term until deflationary pres- sures disappear and inflation returns to its target of +1%, or even 2% if Abe’s election campaign proposal is adopted.
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Households will curb their spending in 2013. Unlike what the annual figure suggests, growth in consumption in 2012 has not been satisfactory, with a strong rebound in only one quarter out of four, the others showing either a sta- bilization (Q2) or a decline (Q3 and probably Q4). This listless growth dynamic is expected to continue through to 2013. While the job market is expected to hold up well until Q1 2013, on the back of the ongoing recon- struction program, the trend should tail off after the withdrawal of stimu- lus, with surveys in the private sector already pointing to a decline. As regards purchasing power, income indicators are downbeat, with a weak- ened outlook for wages and persistent deflationary pressures. Continued monetary easing should gradually pave the way for a reversal of this trend.
Companies will defer spending to 2014. In 2013, investment will slow- down compared with 2012. Companies are reluctant to invest in light of the uncertainty overhanging demand, the weakening profitability indicators at the end 2012 (decline in profits in H2 2012) and unfavorable financing con- ditions (high interest rates in a defla- tionary environment). Also, after declining by -3%, insolvencies are expected to increase by +2%.
Exports should continue to perform positively but will be overshadowed by imports in 2013. Exports are expected to increase slightly in 2013 as a result of base effects linked to the slump in H2 2012. Imports are likely to continue their positive trend, driven by the reconstruction projects._MI/ML
To watch…
>Changes in the fiscal policy implemented under the new government . >Changes in the monetary policy with the appointment of a new BoJ Governor (April 2013) . >Changes in exports new orders. >Geopolitical context in Asia._