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Japan Outlook − A little help from my friends

Thu, Sep 24 2009, 07:07 GMT
by Flemming J. Nielsen

Danske Bank A/S

• Japan started to recover in Q2 09 driven by a strong rebound in exports to the rest of Asia, inventory cuts gradually easing and fiscal stimuli. The recovery appears to be on a solid footing for the rest of the year, as these recovery drivers will largely remain in place.
• In 2010 the recovery will lose some steam, as the positive impact from fiscal stimuli and the inventory cycle starts to wane. The current strong pull from Asia will be hard to sustain in 2010, although Japan’s dependence on the rest of Asia remains a structural advantage.
• Deflationary pressure has increased and inflation is likely to remain negative until late 2010. For that reason, the Bank of Japan (BoJ) is unlikely to start tightening until late in 2010. We think the BoJ will lag in the global monetary tightening cycle likely to start next year.
• We have only made minor changes to our forecasts. GDP growth for 2009 has been adjusted upwards and 2010 marginally downwards, largely reflecting our expectation that the recovery has been pushed slightly forward in addition to upward revisions of Q1 09 GDP.

Recovery on a solid footing for the rest of the year

Just as the contraction in the Japanese economy was unusually sharp in the wake of the global financial crisis, the recovery has so far been strong. In Q2 09 GDP growth rebounded 3.9% q/q AR and is on track to exceed 4% q/q AR in Q3 09. Hence the development in Japan has so far been broadly in line with our forecast in Global Scenarios, June 2009, where we argued for very strong GDP growth in the early recovery phase. The main drivers in the Japanese recovery have been:

• Strong export recovery, driven mainly by exports to the rest of Asia.
• Easing pace of inventory cuts.
• Fiscal easing with a particularly strong impact on private consumption.
• Improved financial conditions.

So far it has been a typical Japanese export-led recovery with the main beneficiary being the manufacturing sector. In Q2, net exports alone added more than 1.3pp q/q to GDP growth. The sharp rebound in exports has mostly been driven by exports to the rest of Asia, not least China. Manufacturing exports to the rest of Asia – accounting for about 50% of Japan’s total exports – soared 15% q/q in Q2. Net exports to Asia alone probably added around to 1pp q/q to Japan’s GDP growth in Q2. Japan is currently without doubt benefiting substantially from its dependence on Asian export markets.

While exports should remain a big positive for Japan, the extraordinarily strong growth in exports to Asia in Q2 and Q3 can probably not be sustained, see Emerging Markets. Exports to Asia are likely to start slowing in Q4 09, but this should be at least partly offset by stronger exports to Europe and the US in the short run as these economies start to recover. Hence, the important export driver appears to be solidly in place until early 2010. However, we have some doubt about its strength later in 2010.

• Download full Euroland Outlook with charts

Published on  Thu, Sep 24 2009, 07:12 GMT