Bangkok--28 Sep--Standard & Poor's
Japan's revision of its second quarter (April 1 to June 30, 2009) real GDP growth to 2.3% from a first estimate of 3.7% on an annualized basis (0.6% from 0.9% against the previous quarter) indicates a much weaker rebound of its economy than originally forecast. Nevertheless, Standard & Poor's Ratings Services is still of the opinion that the worst is over for the economy of Japan (AA/Stable/A-1+) and that a slow recovery is underway.
Net exports of goods and services contributed to 1.6% of GDP growth while a drop in total domestic demand reduced GDP growth by 1.1% in the second quarter of 2009. Domestic demand in the public sector contributed to 0.3% growth, while sluggish demand in the private sector trimmed growth by 1.3%. Despite a quarter-on-quarter rise in government capital formation of 7.5%, overall domestic demand contracted by 1.0%. This reflected weak private sector investment in the housing (growth down 9.5% quarter on quarter) and non-residential (minus 4.8%) sectors, as well as only modest growth in personal consumption of 0.7%. Exports grew by 6.4%, while imports contracted 5.1%, due mainly to the significant drop in global oil prices over the last 12 months. While we expect third quarter GDP for 2009 to be positive, we also believe that the subsequent pace of Japan's GDP growth may falter, based on monthly data for July and August 2009.
Mobile phone shipments, a key barometer of domestic consumption, contracted for a 13th consecutive month in July 2009. In terms of capital investments, machine orders slipped 73.3% year on year in August, although this has gradually improved from the plunge of 85% in March. The nominal household expenditure index, which includes households with more than two family members, was down 2.4% year on year in July, its 10th consecutive monthly decline. In real terms, however, growth was positive in the three months preceding July, although the year-to-date level remains almost flat at 0.1%-0.3%. Given weak private sector demand and the government's weak fiscal position, the future pace of recovery of Japan's GDP growth remains dependent on the strength of net external demand. As such, Standard & Poor's believes that Japan's GDP will contract about 5.7% in calendar 2009, before growing about 0.9% in 2010.
In general elections held in Japan on Aug. 30, 2009, the Democratic Party of Japan (DPJ) ousted the ruling Liberal Democratic Party (LDP), which, with the exception of an 11-month period from August 1993, had held power continuously since 1955. As such, the new DPJ-led coalition, which took power on Sept. 16, 2009, has virtually no experience in government.
The DPJ has yet to announce a coherent macro economic policy, although its official agenda focuses more on distribution than the previous administration. Current proposals include an overhaul of the budgeting system aimed at making more efficient and effective use of public funds. Initiatives put forward by the DPJ include:
--Providing more comprehensive child benefits;
--Scrapping highway toll fees; and
--Giving subsidies directly to farmers rather than through intermediaries, such as agricultural cooperatives.
The incoming administration intends to fund these initiatives mainly by reallocating funds and using some existing reserves in special accounts.
If the DPJ is able to achieve meaningful structural changes in terms of making the budget allocation system more efficient and effective, it would likely help boost economic growth in Japan. However, with no detailed plan, the question remains as to how the new administration will reallocate public funds without increasing the size of the fiscal deficit. As such, the risk of future budget overruns remains.
The risk of deflation in Japan is deepening, with the headline Consumer Price Index (CPI) contracting 2.2% in July 2009 on a year-on-year basis. However, excluding energy and fresh food items, the actual decline in the CPI was only 0.9%. When removing fresh food items only from the headline CPI, the results were the same as the headline numbers, with a contraction of 2.2%. As such, the most significant portion of this contraction can be attributed to lower global oil prices.
Nevertheless, as domestic demand is expected to remain weak and the yen strong against major currencies, we believe that there is a risk that deflationary pressures will linger. We anticipate no change in the Bank of Japan's monetary policy in 2009. Although the central bank may implement emergency measures to stabilize financial markets, we expect it to gradually wind these actions down.
A Japanese-language version of this media release is available on Standard & Poor's Research Online at www.researchonline.jp, or via CreditWire Japan on Bloomberg Professional at SPCJ .
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