The Japanese economy slowed down in the first half of 2008, but only gradually; inflationary concerns caused domestic demand to be sluggish, but increased exports kept the expansion going. After the Lehman shock in September, however, the economy fell into a downward spiral of deteriorating business conditions, declining domestic demand, sharply shrinking exports, and cuts in domestic production. It appears that the economy peaked around the beginning of 2008 and that we are now in a recession.
In 2009 the positive impact of monetary and fiscal policy moves to stimulate the economy should make itself felt, but the aftereffects of the financial crisis, including the tightness of business credit, may result in further contraction, particularly in the first half of the year. Domestic demand seems bound to remain sluggish on into the second half, but there are hopes for a pickup in exports, notably shipments of capital goods to the Asian market, reflecting the effect of China's large-scale economic stimulus measures. Though the recovery is likely to lack dynamism, renewed growth in external demand should allow the economy to find its way gradually back to an upward path. Our current outlook for fiscal 2008, ending this March, is for a real growth rate of -1.0%, and we see a second straight year of negative growth as inevitable in fiscal 2009, but our outlook is for the margin of contraction to be more moderate thanks to the positive turn in external demand; our forecast calls for real growth of -0.6%.
Consumer spending is likely to be adversely affected by further deterioration in the jobs and income picture, which will delay recovery in sentiment about the economy; we expect consumption to remain sluggish even if inflationary concerns recede. Capital investment is seen as continuing to contract as a result of heightened feelings of overcapacity and excess employment among business managers, along with tightness of credit and the persistence of poor earnings performance. Residential investment is also expected to decline again; expanded tax breaks for housing loans and other measures to encourage purchases of homes are liable to have little effect in the face of the weakness in employment and incomes. We forecast 990,000 housing starts in fiscal 2009.
The Japanese economy has experienced 13 recessions since the end of World War II, and their average length has been 16 months. The longest was the 36-month downturn following the second oil shock at the end of the 1970s, and the secondlongest was the 32-month contraction following the bursting of the economic bubble at the beginning of the 1990s. Among the factors likely to make the current downturn longer than average, we can cite the delay in restoration of confidence in the financial sector, the loss of growth speed in the emerging economies, and the higher unemployment and lower consumption levels resulting from the rise in corporate bankruptcies.
Economic Indicators: Forecast for Fiscal 2008 and 2009
Note: Figures for FY 2008 and 2009 are our forecasts; the 2008 figures incorporate official statistics up to the second preliminary estimates for July–September.
(Soichi Okuda, December 16, 2008)
