The Japanese Economy Expects a Big Boost to FY13 Growth from Policy Effects

11.04.2013 -

Rising Sun - Expectations regarding the economic policies of Japan's new government have risen and the mood has quickly shifted since the December 2012 Lower House elections. The coalition government between the Liberal Democratic Party, headed by Prime Minister Shinzo Abe, and the New Komeito, had campaigned on promises of stimulative and reflationary economic measures, and the new government has been steadily delivering following its inauguration.

Emergency economic measures for the revitalization of the Japanese economy are one of the three prongs of so-called ‘Abenomics', and JPY13.1 trillion in spending (of this, a total of JPY10.3 trillion is related to emergency economic measures) and the second biggest supplementary budget ever were approved in mid-January. Monetary policy changes include the introduction of a price stability target of 2 %, agreed upon at the end-January Monetary Policy Meeting. Together with the Government, the BoJ released a joint statement expressing resolve to ‘achieve this target at the earliest possible time.'

With the introduction of Abenomics, the JPY has been falling. The JPY has weakened from approximately USD/JPY80 to the USD/JPY90 range, and from EUR/JPY110 to more than EUR/JPY120. The JPY's weakening has caused share prices to surge. Corporate and household sentiment have also started to improve automatically. The leading DI of future economic conditions in the Economy Watchers Survey and consumer confidence rose considerably in January, to the highest level since the collapse of Lehman Brothers.

Japan's economy had been nearly on the precipice of another downturn as overseas economies slowed, but now appears to be headed toward a recovery, because of the stimulus measures under the Abe Administration. First, the supplementary budget was passed in February, and appears likely to be executed quickly in order to lay the groundwork for the Upper House election in July and the consumption tax hike. Because of this, spending will be concentrated in FY13 and is expected to help push up economic growth for the year. This is likely to offset the drop-off in spending related to earthquake reconstruction. Further, in light of Abenomics, the USD/JPY exchange rate is now expected to reflecta 10 % weakening of the JPY. This is estimated to result in an aggregate positive impact on real GDP for the year because of an improvement in net exports (an increase in exports and decrease in imports), the ripple effect triggered from a rise in exports, and a wealth effect from higher share prices. As a result, real GDP growth is anticipated to be fairly strong, at a rate of 2.2 % YoY in FY13. On the other hand, a major concern is the risk of reflationary policies being too effective and hurting confidence in Japan's policy management as a result. If this happens, market interest rates could jump and impede private sector demand. In addition, if the JPY keeps weakening, rising import costs could be a growing burden.

Current Situation Corporate Sector and Outlook

Exports have been declining as overseas economies have weakened and because of the tensions with China, buthave been showing signs of bottoming recently in terms of volume. Going forward, exports are projected to keep recovering, propelled by the sudden weakening of the JPY and gaining more upward momentum as overseas economies improve. Further, production rose 2.4 % MoM in December as overseas demand stopped falling and on expectations of a recovery in domestic demand as well as inventory adjustments. Output is expected to keep rising at the same pace in January and February (by 2.6 % MoM in January and 2.3 % MoM in February, according to the manufacturers production forecast survey).

Real capital expenditures slumped by an annualized -9.9 % QoQ in Oct-Dec, the fourth straight quarter of decline. However, machinery orders (private sector, excluding the shipbuilding and power industries)-a leading indicator of capital expenditures-rose for the first time in three quarters in Oct-Dec, and are projected to rise again in Jan-Mar, however slightly. As described above, economic sentiment has improved suddenly recently. The real positive effects of a weaker JPY pushing up profits, especially for exporters, are very likely to become more apparent. Amidst these developments, capital expenditures are likely to slowly recover.


Bank of Tokyo- Mitsubishi UFJ, Ltd

Breite Str. 34
40213 Düsseldorf

+49 211/3667337
+49 211/3667433