Japan's Economic Outlook: Challenges and Opportunities

Strategic Insights -

Japan's DPJ government, having secured a significant victory in the lower house election, faces numerous challenges in implementing its policy agenda amidst a fragile economic recovery. The government's attempt to reform the post-war economic model, characterized by export-led growth, will be hindered by deflation and a declining population. Furthermore, Japan's dependence on its junior coalition partners will likely be reduced following a potential triumph in the upper house election, freeing the DPJ to pursue its own agenda.

Key Takeaways:

  • The DPJ government's coalition with the Social Democratic Party and the People's New Party has become increasingly strained, with many commentators questioning who is actually in control.
  • The DPJ's decision not to extend Japan's refuelling operations in the Indian Ocean to support the allied military campaign in Afghanistan has created tension with the US.
  • Japan's economy is expected to experience a modest recovery in 2010, with a 1.4% increase in real GDP, but will be constrained by a declining population and limited fiscal flexibility.
  • Deflation is expected to persist in 2010, with consumer prices forecast to decline by 0.4%, and real wages continuing to fall.
  • The yen is expected to continue its uptrend in the next two years, benefiting from Japan's status as a relatively safe haven, with an average exchange rate of Y88:US$1 in 2010 and Y87:US$1 in 2011.
  • Japan's trade surplus is expected to expand to US$55.3bn in 2010, and further in 2011, but will remain below its 2007 peak.

Statistics:

  • Real GDP growth in Japan is forecast to increase by 1.4% in 2010.
  • Consumer prices are forecast to decline by 0.4% in 2010.
  • Average monthly earnings down by 3.3% year on year in October 2009.
  • Japan's trade surplus is forecast to expand to US$55.3bn in 2010.
  • Japan's current-account surplus is forecast to remain fairly stable, at US$145.6bn in 2010 and US$152.3bn in 2011.
  • International oil prices (dated Brent Blend) are forecast to average US$75/barrel in 2010, and fall to US$70/b in 2011.

Sources:

  • The Economist Intelligence Unit Outlook for 2010-11 Domestic Politics