Economic policies required of incoming Abe administration(Dec 2012)

◆Economic policies required of incoming Abe administration: The election of the 46th House of Representatives held on 16 December 2012 has set the stage for the Liberal Democratic Party leader Shinzo Abe to form a coalition government with New Komeito. In this report, we analyze economic policies the incoming Abe administration will need to firmly pursue 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 the Bank of Japan (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 the BOJ would be effective in ending deflation.

◆Economic outlook revised upward: In light of the second preliminary Jul-Sep (3Q) 2012 GDP report (Cabinet Office), we have revised our economic growth outlook upward. We now forecast real GDP growth of +1.0% y/y for FY12 (previous forecast: +0.7%) and +1.1% for FY13 (+0.9%). Factoring in the annual revision of FY11 GDP, released along with the second preliminary 3Q 2012 GDP report, we have revised our outlook for public works spending substantially upward.

◆Our main scenario and risks facing Japan’s economy: With the worsening of foreign economies, it is highly probable that Japan’s economy peaked in March 2012 and has slipped into recession. Despite the existence of downside risks, as our main scenario we believe that Japan’s economy will follow a path of gradual recovery in 2013 and beyond, supported by three factors: (1) pickup of the US and Chinese economies, (2) reconstruction demand related to the Great East Japan Earthquake, and (3) further monetary easing by the BOJ. Risks that will need to be borne in mind for Japan’s economy are: (1) any deepening of the European sovereign debt crisis, (2) worsening of Japan-China relations, (3) the US fiscal cliff, and (4) a surge in crude oil prices stemming from geopolitical risk.