Japan's Medium-term Economic Outlook -February 2013-

◆We have revised our July 2012 medium-term outlook for Japan’s economy. The biggest change in the past half year has been the debut of the Abe administration which is promoting a so-called “Abenomics” agenda, consisting of such policies as bold monetary easing, flexible fiscal expenditures, and growth strategies. Whether these policies will prove effective, however, will greatly depend on the direction of the world economy. For our current outlook, we assumed a more conservative view of the world economy. As a result, we now forecast that Japan’s economy will increase 1.5% (real) and 2.1% (nominal) over the next 10 years (annualized average rates).

◆While the Bank of Japan (BOJ) has adopted a “price stability target”, this does not necessarily mean a change in its monetary policy framework. Since the price stability target is not the ultimate goal, the key issue will be how the government and the BOJ will work together to achieve it. If structural factors relating to deflation are examined in terms of unit labor cost, to put an end to deflation it will be essential that companies strengthen their profit foundations in the context of easy monetary policy and that a safety net enabling the smooth rehabilitation of companies and the reemployment of workers is established. The yen depreciating against the dollar does little in the short term to increase prices. Even if depreciation continues over the long term, a good amount of time will be needed before prices start to rise. What should be done is to view a weaker yen as an opportunity for revising regulations and promoting institutional reform. In the process, medium- to long-term growth capacity rather than the shortterm growth rate should be emphasized.

◆Higher energy prices, such as for electricity, will risk becoming a major impediment for the growth of Japan’s economy if they are left unaddressed. However, the government designing appropriate energy policies using the price mechanism can be expected to provide corporate incentives to link the issue of energy efficiency and diversification with economic growth.