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Japan's Medium-term Economic Outlook -July 2012-

Japan faces fork in the road as globalization/graying of society progress

Tomoya Kondo

Mikio Mizobata

Keiji Kanda

Summary

◆We have revised our January 2012 medium-term outlook for Japan’s economy. In the last half year, the European sovereign debt crisis and the slowing of emerging economies have increased uncertainties bearing on the world economy. In our current forecast, we adopted a more conservative view of the world economy and assumed more restrained growth of social insurance benefits reflecting the growing need to rebuild government finances. As a result, we now forecast that Japan’s economy will increase 1.4% (real) and 1.9% (nominal) over the next 10 years (annualized average rates).


◆Whether the advance of manufacturing industries overseas will cause domestic economic activity to contract will depend on the magnitude of substitution and scale effects. Companies moving operations abroad does not necessarily result in the hollowing out of the economy. A quantitative analysis has revealed a relationship where an accelerated shift to offshore production by the chemical, iron/nonferrous metal/other metal, and electrical machinery industries gives rise to higher exports from Japan.


◆Turning to the effect of age and age cohorts, keywords for consumption in a hyper-aged society will be “home-oriented/leisure”, “maintenance”, and “safety/security”. In terms of growth strategies, since diverse human resources and the reeducation of workers will be necessary in the years to come, the provision of goods and services that lessen household duties will be required.


◆When viewed in the long term, the unemployment rate is experiencing a secular rise through the downward rigidity of nominal wages and increase in the ratio of non-regular to overall employees. An examination of the consumption structure by employment category discloses that the ascent of the proportion of non-regular employees has increased demand for necessities and reduced that for non-essential and non-urgent goods.

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