Japan's Economy: Monthly Outlook
Impact of Anti-Japan Protests in China(Oct 2012)

Economy on the verge of recession; five downside risks

October 23, 2012

  • Mitsumaru Kumagai
  • Masahiko Hashimoto

Main Points

◆Economy on the verge of recession: The slowing tempo of Japan’s economy has intensified. Major economic indicators released in September and since suggest that the economy is on the verge of recession. As our main scenario we believe that Japan’s economy will stagnate through end-2012 but return to a moderate recovery trend in 2013 and after, supported by (1) reconstruction demand related to the Great East Japan Earthquake, (2) the US and Chinese economies steering away from bottom deepening, and (3) further monetary easing by BOJ. Risks facing Japan’s economy and which warrant monitoring are (1) any deterioration in Japan-China relations, (2) deepening of the European sovereign debt crisis, (3) a surge in crude oil prices stemming from geopolitical risk, (4) further appreciation of the yen, and (5) the current account balance turning negative.

◆How should the impact of anti-Japan protests in China be understood?: In this report, we have made a quantitative analysis of the impact of anti-Japan protests in China. It should be borne in mind that if Japan-China relations worsened rapidly, Japan’s economy would be seriously impacted.

◆Policy responses required of the government and BOJ: Amidst persistent deflation, the policy authorities will need to firmly pursue economic policies to restore the economy centering on four points: (1) there should be consistent policies based on a firm vision (national vision and philosophy) of the top leaders, (2) instead of focusing only on domestic demand and the demand side, economic policies should be implemented that are well balanced and that embrace foreign demand and the supply side, (3) government finances should be rebuilt by raising the consumption tax and reducing expenditures centering on social security costs, and (4) the government and BOJ should work together more closely. Regarding the last, based on an analysis using the Granger causality test, a weaker yen and higher stock prices ensuing from further monetary easing by BOJ would be effective in ending deflation.

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