Core Views
The earthquake and tsunami should have tipped the economy back into recession in the middle of this year as destroyed and idled capacity reduce overall production. This should lead to a steep slowdown in economic growth to 0.7% in 2011, from 3.9% in the previous year.
While reconstruction efforts will lead to a growth boom in late 2011 and 2012, the rebound should be relatively weak at 1.8% next year.
Consumer spending will feel the bulk of the wealth loss from the earthquake/tsunami, as resources must be freed up to allow for the reconstruction of affected areas. Consumer spending will struggle to keeps its head above water in 2011, resulting in virtually no growth this year, compared with 1.9% in 2010. Furthermore, the extent of the deterioration in the public accounts raises fears over future consumption tax hikes and spending cuts. We see no reason to expect a boost to private consumption in 2012, and maintain a downbeat
1.4% forecast for 2012.
Japan’s current account dynamics are likely to change shape following the earthquake and tsunami, as exports suffer while imports stay elevated due to the need to import higher levels of raw materials for reconstruction and power generation. As such, we believe the country will run a smaller trade surplus of 1.4% of GDP in 2011 (from 1.7% last year), owing largely to disruptions to the export sector. The recent passage of the JPY4.0trn disaster relief budget, although necessary, adds to our concerns over fiscal sustainability. While the budget statement stressed that ‘to maintain confidence of the bond market, financial resource of the Supplementary Budget are secured by reallocation or reduction of predetermined expenditures, not by additional bond issuance’, we believe that Japan’s overall debt situation will deteriorate as official pension assets are used for funding and further supplementary budgets are likely to be announced.
Major Forecast Changes
We have bumped up Japan’s average consumer price inflation figure for 2011 to 0.2%, from -0.7% on the back of higher energy costs following higher global fuel prices, as well as the power shortage resulting from the shutdown of the Fukushima Daiichi nuclear plant in Tohoku.
Key Risk To Outlook
The main risk to Japan’s economy comes from a fiscal crisis that could result from the increase in debt issuance that will likely be needed to fund reconstruction efforts. While the bond markets remains underpinned for now, the possibility of a failed bond auction cannot be discounted given the huge debt burden of the central government.
Another major risk to our economic outlook comes from another collapse in external demand as was seen in the height of the global financial crisis. This would come at the worst possible time for the economy which is currently suffering from negative domestic demand growth.
While unconventional quantitative easing, including the purchase of risk assets such as exchange traded funds and real estate investment trusts, may help stem deflation over then next few quarters or even years, the risk of a sudden onset of hyperinflation over the longer term has increased considerably.
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Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risk To Outlook5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Kan’s Downfall A Matter Of Time
Prime Minister Naoto Kan is facing increasing pressure by lawmakers to step down, a move that we believe will come in August
Table: Political Overview8
Long-Term Political Outlook 9
Can Any Government Reverse National Decline?
Japan’s political scene will be more unpredictable in the 2010s, now that the country has moved beyond sole rule by the Liberal Democratic Party
Chapter 2: Economic Outlook 13
SWOT Analysis 13
BMI Economic Risk Ratings 13
Economic Outlook 14
V-Shaped Recovery Not On The Cards
Real GDP contracted by 09% quarter-on-quarter in Q111, sending the Japanese economy back into recession
TABLE: ECONOMIC ACTIVITY14
Monetary Policy 15
Staying Accommodative, But Beware Of Hyperinflation Risk
While we expect the Bank of Japan to maintain its ultra-loose monetary policy as inflation remains benign in 2011, we caution that the risks of hyperinflation has increased significantly
TABLE: MONETARY POLICY16
Banking Sector 17
Weak Recovery To Weigh On Industry Performance
The Japanese banking industry’s short-term performance should receive a temporary boost from higher loan demand associated with reconstruction efforts following the Tohoku Pacific earthquake in March
Economic Activity 19
Real Estate: Quake Repercussions Not Over Yet
We expect Japanese property prices as a whole to be weighed down by the impact of the Tohoku Pacific earthquake, as reparations will be needed to restore damaged properties
Chapter 3: 10-Year Forecast 21
The Japanese Economy To 2020 21
Three Barriers To Robust Growth
There are three factors that stand in the way of Japan achieving anything other than meagre real GDP growth over the coming decade: demographics; the fiscal burden; and the low return on investment
TABLE; Long-Term Macroeconomic Forecasts21
Chapter 4: Business Environment 25
SWOT Analysis 25
BMI Business Environment Risk Ratings 25
Business Environment Analysis 26
Tax Reduction No Silver Bullet To Boosting Competitiveness
Tokyo’s move to reduce the corporate tax rate by 5% to around 36% (depending on locality or industry), from 41% previously will help support Japan’s business competitiveness or even boost official revenue intake at the margin
Business Environment Outlook 27
Institutions 27
Table: BMI Business And Operation Risk Ratings27
Table: BMI Legal Framework Rating28
Infrastructure 29
Table: Labour Force Quality30
Market Orientation 31
TABLE: ASIA, ANNUAL FDI INFLOWS31
Table: Trade And Investment Ratings32
Operational Risk 33
TABLE: TOP EXPORT DESTINATIONS33
Chapter 5: Key Sectors 35
Tourism 35
Table: Arrivals Data, 2007-2015 (‘000)36
Other Key Sectors 37
Table: JAPAN Oil and Gas Sector Key Indicators37
Table: JAPAN Defence and Security Sector Key Indicators37
Table: JAPAN Autos Sector Key Indicators37
Table: JAPAN Telecoms Sector Key Indicators38
Table: JAPAN Pharma Sector Key Indicators38
Table: JAPAN Food and Drink Sector Key Indicators38
Table: JAPAN Infrastructure Sector Key Indicators39
Table: Japan Freight Transport Sector Key Indicators39
Chapter 6: BMI Global Assumptions 41
Global Outlook 41
Second Half Risks
TABLE: GLOBAL ASSUMPTIONS41
Table: EMERGING MARKETS AGGREGATE GROWTH42
Table: DEVELOPED STATES REAL GDP GROWTH FORECAST43
Table: REAL GDP GROWTH CONSENSUS FORECASTS43
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