- Japan is returning to growth. We expect growth in H2 09 to exceed potential growth significantly and outperform both the US and Euroland. In addition to fiscal easing, the main explanation is a rebound in industrial activity driven by an extraordinarily strong inventory cycle and recovery in exports particularly to the rest of Asia.
- However, the outperformance will be temporary and should, in our view, mainly be regarded as a catch-up on the earlier strong underperformance. Hence, we still do not expect the Bank of Japan to be among the first major central banks to tighten monetary policy.
Japan set to outperform Euroland and US in H2 09
We currently expect Japan’s GDP growth to rebound above trend in H2 09 and outperform both the US and Euroland. Besides fiscal easing, the main driver will be a sharp rebound in industrial activity. While industrial production in Euroland and the US continues to decline, industrial production in Japan is rebounding sharply. In April, industrial production increased by 5.9% m/m – the biggest monthly increase in industrial production recorded for more than 50 years. However, this record will probably not last long, as we expect industrial production to have surged by another 8% m/m in May. The main reasons for the strong rebound in industrial activity are an extraordinarily strong inventory cycle within the auto and electronics industry and renewed growth on the increasingly important Asian markets.
Benefits from recovery in Asia
Japan is currently benefiting from its greater dependence on Asian markets, which appear to have resumed growth. The importance of the Asian markets has grown immensely in recent years. Currently 54% of Japanese merchandise exports are shipped to other Asian markets, while less than 30% is currently destined for the EU and the US. In 2002, the rest of Asia on the one hand and the EU and US combined on the other accounted for a more or less equal share of Japan’s exports. The importance of the Asian markets for Japan’s economy is magnified by the relative openness of the Japanese economy. We estimate Japans exports to Asia to be about 9% of GDP, while US exports to Asia is less than 3% of GDP.
With a resumption of growth in other parts of Asia, the Japanese export engine has been turned on again. In volume terms, exports to the rest of Asia are up by 12% since February, while volume exports to the US and Europe have been broadly unchanged in the same period. As seen in the chart to the right, our indicator for net exports’ contribution to GDP growth now suggests there will be a significant positive contribution to GDP growth from net exports. We expect the contribution to GDP growth from net exports to exceed 3% q/q AR in both Q2 and Q3. One important implication is that Japan’s trade balance should return to surplus after being in deficit since July last year.
