Examination of Japan's Export Competitiveness(Sep 2012)

◆Economic outlook revised: In light of the second preliminary Apr-Jun 2012 GDP report (Cabinet Office), we have revised our economic growth forecasts. We now forecast real GDP growth of +1.8% y/y for FY12 (previous forecast: +2.2%) and +1.2% for FY13 (+1.4%).

◆Main scenario and risks for Japan’s economy: Despite the existence of downside risks, as our main scenario we believe that Japan’s economy will continue to expand gradually, supported by (1) reconstruction demand related to the Great East Japan Earthquake, (2) pickup of the US and Chinese economies, and (3) further monetary easing by BOJ. Risks facing Japan’s economy are (1) any deepening of the European sovereign debt crisis, (2) a surge in crude oil prices stemming from geopolitical risk, (3) further appreciation of the yen, and (4) the current account balance turning negative in the future.

◆Examination of Japan’s export competitiveness: Examining Japan’s export competitiveness in comparison with Germany and South Korea, we found that the export competitiveness of Japanese companies has declined substantially centering on the electrical machinery industry. Japanese policy authorities should establish, in a balanced manner, three bulwarks against a strong yen: (1) BOJ should ease monetary policy further to brake the appreciation of the yen, (2) the economy’s ability to withstand a strong yen should be strengthened, and (3) policies should be actively implemented that take advantage of a strong yen. Also, Japanese companies will need to learn how to build brand equity from Germany and how to strengthen marketing power from South Korea.