2013 Growth Upgraded At Expense Of Fiscal Stability
BMI View: We believe that Prime Minister Shinzo Abe's direct approach to encourage wage increases and business spending will likely bolster growth in private consumption and investment in the near term. With leading indicators showing much sought-after improvements, we believe the optimism of a regime change in Japan will help drive a pickup in economic activity in 2013. As such, we have revised up our forecast for 2013 GDP to 1.4% from our previous forecast of 0.9%. That said, we maintain our view that the government's policies will not return the Japanese economy back to the path of recovery, but rather heighten the risk of a fiscal crisis.
The Japanese economy grew by 1.9% in 2012, after recording a tepid average growth rate of 0.8% for past 17 years. The aggressive policy stance that Prime Minister Shinzo Abe has adopted has led to optimism that his policies will revive the Japanese economy. The contraction in Japanese economy slowed in Q412 to 0.1% quarter-on-quarter (q-o-q) in seasonally-adjusted terms, from a decline 1.0% q-o-q in Q312, even before his return to power. Furthermore, we have seen signs that the increasingly positive outlook is likely to be translated to a pickup in activity. We believe that a short-term recovery is already underway and have revised up our 2013 GDP forecast to 1.4% from 0.9%. Despite this, we maintain that these expansionary policies will aggravate the country's weak fiscal position and pushes Japan closer to a fiscal crisis.
|Times Don't Look As Bad Anymore...|
|Japan - Consumer Confidence Index & Some Sub-Indices|
Wage Increases Bolster Consumer Optimism
Unlike his predecessors, Prime Minister Abe has taken a more business-directed approach in certain areas, which we believe will provide a mild boost to private consumption and investment. The Abe administration has implemented policies that should directly motivate businesses to boost hiring. One example is the change in tax policy, where businesses will receive tax relief based on the rise in cost resulting from wages and headcount increases. We believe the recent small improvements in jobs-to-applicants ratio and growth in total cash earnings are signs of Abe's direct approach taking root, and we expect these marginal improvements to lift private consumption growth in 2013. Indeed, the consumer confidence index leaped back to June 2010 levels in January, and was accompanied by improved outlook for income, employment and an increase in consumers' willingness to buy durable goods. That said, we believe these measures are unlikely to replicate the boost in growth that previous fiscal subsidies created (for e.g. environmentally-friendly cars in 2012). As such, we have revised up our forecast for private consumption growth to come in at 1.5% in 2013, up from our previous forecast of 0.6%, but much lower than the pace of 2.3% recorded in 2012.
|Japan - Private Sector Machinery Orders & Excluding Volatile Orders, % chg y-o-y|
Business Activity Ticking Up
Accompanying the rise in consumer sentiment are signs of an improving business outlook. Shoko Chukin Bank's Small Business Confidence index improved in the first two months of 2013 and the growth of private sector orders for machinery (excluding volatile items) returned to positive territory in December 2012. These signs suggest that optimism amongst businesses are picking up faster than we previously forecasted. Tokyo Stock Exchange Index's Small Index continues to outperform the wider index, suggesting that small businesses are at the forefront of this economic recovery. With Abe's new temporary tax reliefs for companies that increase capital investment, and businesses turning more optimistic on further demand, we believe that private investment is likely to keep pace with 2012, and have raised our 2013 private fixed capital growth forecast to 2.0% from 1.5% previously.
|Japan - TOPIX Small Index, TOPIX Index & Their Ratio|
Imports To Remain A Drag
The return of nuclear power now looks further away than we had originally anticipated, given the recent implementation of new seismic and fault tests that will delay the reopening of nuclear plants. In light of the increasingly complex regulatory environment and greater obstacles for plant restarts, we have raised our import forecasts, expecting inbound shipments to grow by 3.5% in 2013 versus our previous forecasts of 1.5%. That said, we maintain our view that the rising business activity will eventually lift power use and pressure the government to reopen some nuclear plants, even if at a much slower pace than our prior estimates. While we remain wary that rising cost of power to households and businesses could dampen economic activity, we believe that the government is likely to step in should these costs threaten growth.
Fiscal Problems Aggravated, Not Resolved
Alongside Abe's various policies that are targeted at businesses and consumers, his government has also renewed its focus on public investment, reflected by its allocation almost 30% of its supplementary budget to infrastructure projects. We maintain that it is unlikely that all of the planned projects will be completed given the rising costs for inputs and shortages of labour. Moreover, we believe that the government's growing investment continues to crowd out private sector participation, and leaves the country ever more reliant on further fiscal stimulus. Given that most of Japan's public works are financed through debt and many of the new tax policy changes will further weigh on fiscal revenues, we believe the government's infrastructure plans only serve to aggravate the country's fiscal problems. As such, even as we upgrade our growth forecasts, expecting 2013 GDP growth to come in 1.4%, we maintain our view that Abe's policies aggravate the country's fiscal woes, which will undermine medium-term economic growth.