By Prieur du Plessis, on May 24th, 2011 posted in: Economy, Japan Leave your comment

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This post is a guest contribution by Takehiro Sato and Takeshi Yamaguchi of of Morgan Stanley.

Real GDP in January-March showed a second straight quarter of negative growth as a result of the earthquake, falling 0.9%Q (annualized -3.7%), but we believe that the domestic economy absorbed the direct effects of the quake during March and had already embarked on a recovery trajectory by April. For example, March saw the largest fall in production activity on record, but we expect METI data for April-May to show a swift recovery. April 10 was the deadline for submitting responses to METI’s aforementioned survey of production forecasts, and forecasts for a strong rebound in April-May carry some uncertainty. However, on the other hand, consumer spending was already picking up in April as the ‘stay-at-home’ mood dissipated and we understand it is relatively brisk now, so we think we can reasonably take the view that economic activity, aside from external demand, has been heading gradually back to normal since April. With regard to external demand, however, Japan posted a trade deficit for early/mid-April due to plummeting exports and import substitution, and we expect the deficit to have endured for the whole of April. We expect external demand to exert significant downward pressure on growth, particularly in the April-June quarter.

Positive and Negative Developments Since Our Last Update

Positive developments since we reviewed our outlook on March 31 are (1) besides the avoidance for now of planned power cuts in eastern Japan, upgrades to electricity supply plans which have made it possible to narrow the target for corporate electricity savings in the summer from 25% initially to 15%, and (2) the outlook for earlier-than-expected resolution to supply chain issues as a result of corporate efforts to tackle the obstacles.

Nevertheless, we do not expect the course to recovery ahead to be smooth. Negatives from the angle of the economy are (1) the possibility of production line operating rates remaining low even after operations resume, and potential for supply chain issues to continue having an effect, including fresh suspension of production or further declines in operating rates depending on the situation with parts procurement, (2) the possibility that uncertainty about future electricity supply will linger after the summer and into the medium term, including tighter supplies with suspension of nuclear plant operations and the start of new regular maintenances, and (3) from the angle of external demand, the possibility of slow export recovery and increased import substitution lowering the contribution to growth.

On the policy side as well, negatives include (1) use of virtually the full amount of the first supplementary budget in recombined existing expenditures, preventing much feed-through to stimulation of new demand, and (2) the mounting likelihood that the next large supplementary budget will not be drafted until the summer or later, as a result of issues relating not just to reconstruction plans but to funding sources too. Hence, though we expect downward momentum in April-June GDP to be less severe than we foresaw initially – indeed, in terms of direction we believe the trend is already towards recovery – we do not hold very high expectations of V-shaped recovery momentum from July-September, or October-December.

High Oil Price Is a Looming Risk for Overseas Economies

Conditions in the global economy, previously viewed as a lifeline for the Japanese economy, are also becoming less certain due to the high oil price. In 2007-08, as the oil price moved further into the $100/barrel level, the global economy was already decelerating before the Lehman shock, and did not take long to enter full-fledged recession. The Japanese economy peaked in October 2007, and the US also entered recession a little later in December 2007. The US economy is no longer in recession, but balance sheet correction in the household sector is still curbing upside potential, and our US economic team has also lowered its growth outlook for 4Q11 from +4.0%Y initially to +3.3%Y.

Based on the data so far, US economic momentum in April-June, in employment and elsewhere, looks weak in relation to how far demand was pushed back by heavy snow in January-March. Housing prices are still in a moderate downtrend as well, while there is a strong possibility that a gasoline price stalled far above $4/gallon will curb consumer sentiment. Another risk of some concern is rewinding of excess liquidity in global markets if QEII is abandoned as expected at end-June. This is because the markets seem to have factored for the ending of QEII, but possibly not to the full extent. The outlook for European economies, too, is increasingly unclear as a result of the ECB’s premature rate hike and reignition of sovereign debt worries. In emerging markets, clouds have started to form over the outlook for the Indian and Brazilian economies due to currency appreciation on the back of high primary product prices and dramatic inflows of capital.

Continue reading Japan: More moderate recovery path ahead

By Prieur du Plessis, on March 16th, 2011 posted in: Economy, Japan Leave your comment

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“Japan – a shrinking player in the world economy,” says BCA Research in a new report.

“According to IMF data, Japan’s share of global GDP has fallen over the past two decades from a high of about 10% in the early 1990s to under 6% today. Even more noteworthy is that on a purchasing power parity basis, the IMF estimates that Japanese growth has only accounted for about 1% of the world’s growth over the past five years. This is of course mostly due to the rapid expansion in emerging economies, but highlights that even without the devastating effects of last week’s earthquake, Japan is quickly becoming a small player in global growth. It also helps to explain why the blow to financial markets in the region (excluding Japan) has so far been fairly mild.

“In terms of the advanced economies, the country that is likely most susceptible to a slowdown in Japan is Australia – about 20% of Australia’s exports are destined for Japanese markets.

“Bottom line: Last week’s devastating earthquake in Japan may have limited impact outside of the country, given that global growth dynamics no longer rely heavily on a demand impulse from Japan.”

Time will tell …

Source: BCA Research – Daily Insights Service, March 15, 2011.

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