Examination of risk factors: Current account balance turning negative, and Greece leaving the euro(No.173 Update)

Japan to see real GDP growth of +2.4% in FY12 and +1.3% in FY13, nominal GDP growth of +1.7% and +1.0%

  • Mitsumaru Kumagai
  • Satoshi Osanai
  • Chisaki Masukawa
  • Tsutomu Saito


◆Economic outlook revised: In light of the second preliminary Jan-Mar 2012 GDP report (Cabinet Office), we have revised our economic growth forecasts. We now forecast real GDP growth of +2.4% y/y for FY12 (previous forecast: +2.3%) and +1.3% for FY13 (+1.3%).

◆Main scenario for Japan’s economy: In our main scenario, we believe that Japan’s economy will continue to gradually expand supported by three factors, namely (1) reconstruction demand related to the Great East Japan Earthquake, (2) firming up of overseas economies, centering on the US and China, and (3) likely additional easing measures by the Bank of Japan.

◆Medium- to long-term risk facing Japan’s economy is the current account balance turning negative: For Japan’s Economic Outlook No. 173, we undertook a multifaceted examination of risks facing Japan’s economy. Without question, the most significant mediumto long-term risk is the current account balance turning negative. We thus performed a quantitative simulation of Japan’s current account balance over the medium to long term. In our base scenario, Japan will maintain a current account surplus of around Y24 trillion in 2020. In the case of a risk scenario where the appreciation of the yen, higher crude oil prices, and the worsening of the world economy occur simultaneously, Japan’s current account balance would not readily turn negative unless these changes were quite dramatic. However, should manufacturers accelerate their shift to offshore production and should this give way to a “bad” hollowing out of the economy, the possibility would increase of Japan’s current account balance turning negative in the future. Japan’s policy authorities will therefore need to bear in mind the potential for dramatic changes in the economic environment in the future and will need to implement appropriate policies, centering on supply-side economic policies and the restoration of public finances to health.

◆Short-term risk facing Japan’s economy is Greece leaving the euro: Risk factors for Japan’s economy in FY12-13 are (1) the deepening of the European sovereign debt crisis such as through Greece leaving the euro, (2) a surge in crude oil prices stemming from geopolitical risk, (3) further appreciation of the yen, and (4) stagnation of production due to the halting of operation of nuclear power plants. First, we established three scenarios for the size of the haircuts given to the sovereign debt of European nations and calculated how Japan’s economy would be affected. In the worst case scenario, Japan’s real GDP could experience downward pressure of more than 4%. Should the European sovereign debt crisis deepen, such as by Greece leaving the euro, we do not rule out the possibility of Japan sustaining a blow comparable in size to the Lehman Shock. Second, a surge in crude oil prices stemming from increased tension over Iran has the potential of ushering in stagflation (rising prices during an economic downturn) in Japan through the worsening of the terms of trade of Japanese companies. Third, we believe the yen will trade in a relatively narrow range to the dollar for the time being and that sharp appreciation of the yen will be avoided. However, should the deepening of the European sovereign debt crisis accelerate the flight to quality, there is some risk that the yen will appreciate on its own against other currencies. Fourth, the continuation of a situation where the operation of all nuclear power plants remains halted has the potential of placing downward pressure of 0.5% to more than 1% on real GDP.

◆BOJ’s monetary policy: The Bank of Japan is expected to leave its policy interest rate unchanged through at least FY14. Should further appreciation of the yen intensify anxiety regarding a possible economic downturn, the bank may decide on further easing, such as adopting “compulsory” inflation targeting or augmenting funds for its asset purchase program.

【Our assumptions】

◆Public works spending will grow +7.6% in FY12, and -3.4% in FY13; the consumption tax rate will be increased in April 2014

◆Average exchange rate of Y79.0/$ both in FY12 and FY13

◆US real GDP growth of +2.2% in CY12 and +2.6% in CY13

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