September 2010. Sluggish exports and domestic demand halted the recovery in industrial production, which remains about 14% below its pre-crisis peak. The marked improvement in confidence is ending, as companies expect a deterioration in business conditions in the final quarter of 2010 and consumer confidence has started to weaken.
… new fiscal stimulus and private demand are supporting growth
However, a number of factors should prevent a double-dip recession in Japan. First, the government introduced fiscal stimulus packages in September and October 2010, amounting to 0.2% and 1.1% of GDP, respectively. The packages increase public works spending, subsidies to 1 2 http://dx.doi.org/10.1787/888932346933
Japan: Employment, income and inflation
Percentage changes
2008 2009 2010 2011 2012
Employment -0.4 -1.6 -0.4 0.1 -0.3
Unemployment rate1 4.0 5.1 5.1 4.9 4.5
Compensation of employees 0.7 -4.0 1.4 1.2 0.7
Unit labour cost 1.9 1.3 -2.2 -0.6 -0.6
Household disposable income -0.2 -2.0 1.0 0.3 1.0
GDP deflator -0.8 -0.9 -1.8 -0.8 -0.8
Consumer price index2 1.4 -1.4 -0.9 -0.8 -0.5
Core consumer price index3 0.1 -0.6 -1.3 -0.9 -0.5 Private consumption deflator 0.4 -2.2 -1.7 -0.7 -0.8 1. As a percentage of labour force.
2. Calculated as the sum of the seasonally adjusted quarterly indices for each year.
3. Consumer price index excluding food and energy.
Source: OECD Economic Outlook 88 database.
Japan
1. Total cash earnings of all workers, including bonuses.
2. Corresponds to the OECD measure of core inflation.
Source: Ministry of Health, Labour and Welfare; Ministry of Internal Affairs and Communications.
1 2 http://dx.doi.org/10.1787/888932345413 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
-6 -5 -4 -3 -2 -1 0 1 2 %
Special (including bonus payment) Extra (including overtime earnings) Regular
Total cash earnings¹
Wage growth has turned positive Year-on-year percentage change
2006 2007 2008 2009 2010 -2.5
-2.0 -1.5 -1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5
%
CPI Core inflation²
Deflation has become entrenched Year-on-year percentage change
encourage investment in low-carbon activities, child-care support and labour market outlays and extend subsidies for purchases of energy-efficient homes and appliances. As for private demand, corporate profitability is high, helping to sustain business investment. In addition, nominal wage growth turned positive in the second quarter of 2010 for the first time in two years, as large profits boosted bonus payments and firms increased overtime work. However, employment in the first half of 2010 was down almost 1% from a year earlier, keeping the unemployment rate 1 2 http://dx.doi.org/10.1787/888932346952
1 2 http://dx.doi.org/10.1787/888932346971
Japan: Financial indicators
2008 2009 2010 2011 2012
Household saving ratio1 2.3 2.2 2.7 2.8 3.1
General government financial balance2 -2.1 -7.1 -7.7 -7.5 -7.3
Current account balance2 3.3 2.8 3.4 3.7 3.7
Short-term interest rate3 0.7 0.3 0.2 0.2 0.2
Long-term interest rate4 1.5 1.3 1.1 1.2 1.7
1. As a percentage of disposable income.
2. As a percentage of GDP.
3. 3-month CDs.
4. 10-year government bonds.
Source: OECD Economic Outlook 88 database.
Japan: Demand and output
Fourth quarter 2010 2011 2012
Current prices ¥ trillion
Percentage changes from previous year, volume (2000 prices)
Private consumption 282.7 2.4 1.0 1.4 1.7 1.1 1.5
Government consumption 93.6 1.6 1.7 0.3 1.7 1.2 0.1
Gross fixed investment 98.0 -0.1 3.2 2.3 3.4 1.9 3.7
Public1 20.3 -1.5 -1.9 -10.9 0.4 -11.6 -3.3
Residential 13.6 -7.3 4.5 6.1 3.8 5.0 7.1
Non-residential 64.0 1.8 4.6 5.5 4.3 5.5 4.8
Final domestic demand 474.2 1.7 1.6 1.4 2.0 1.3 1.7
Stockbuilding2 - 1.4 0.0 0.0 0.0
Total domestic demand 472.9 1.7 1.6 1.4 2.4 1.3 1.7
Exports of goods and services 59.5 25.4 6.7 5.8 17.0 5.5 5.9 Imports of goods and services 58.1 10.5 6.6 6.5 11.7 5.4 7.0
Net exports2 1.4 1.9 0.1 0.0
GDP at market prices 474.3 3.7 1.7 1.3 3.3 1.3 1.6
Note: National accounts are based on official chain-linked data. This introduces a discrepancy in the identity between real demand components and GDP. For further details see OECD Economic Outlook Sources and Methods (http://www.oecd.org/eco/sources-and-methods).
Detailed quarterly projections are reported for the major seven countries, the euro area and the total OECD in the Statistical Annex.
1. Including public corporations.
2. Contributions to changes in real GDP (percentage of real GDP in previous year), actual amount in the first column.
Source: OECD Economic Outlook 88 database.
2009 2010 2011 2012
high at around 5%, while the job-offer-to-applicant ratio is still low at around 0.5. With large slack remaining in the economy, the rate of core deflation has worsened to about 1.5% (year-on-year) since April, although
½ percentage point is due to the elimination of tuition fees for upper-secondary schooling. In addition, asset prices are falling; the average residential land price fell 3.4% in the year to July 2010, the 19thstraight year of decline, while the stock price index has dropped 15% since April, reflecting, at least in part, concern about the strong yen.
While fiscal stimulus is to be followed by a spending freeze in 2011-12…
The June 2010 Fiscal Management Strategy aims at stabilising and eventually reducing the public-debt ratio, which is projected to reach 211% of GDP by 2012. The medium-term target is to halve the primary budget deficit of central and local governments relative to GDP between FY 2010 and FY 2015. Projections attached to the Strategy – which do not take account of the two most recent fiscal packages – estimate the FY 2010 primary deficit at 6.4% of GDP, implying an improvement of 3.2%
of GDP over the next five years. To meet the target, central and local government spending (excluding debt repayment and interest payments) over FY 2011-13 is not to exceed the level in the initial budget for FY 2010.
… an increase in tax revenues is needed to meet fiscal objectives…
Given that one-half of the October stimulus package is to be spent during FY 2011, the OECD projection assumes that spending (on a general government basis) in FY 2011 will slightly exceed the FY 2010 level, before falling below it in FY 2012. Based on these assumptions, the general government primary deficit is projected to fall from about 7½ per cent of GDP in 2010 to 6¼ per cent in 2012 (on a calendar-year basis, excluding one-off factors), roughly in line with the Strategy’s deficit reduction target.
However, given population ageing and the broad consensus to improve the quality of health care, achieving such spending restraint will require significant cuts in outlays in other areas. Moreover, it will be difficult to 1 2 http://dx.doi.org/10.1787/888932346990
Japan: External indicators
2008 2009 2010 2011 2012
$ billion
Goods and services exports 853.7 637.6 843.9 941 989 Goods and services imports 847.6 621.9 774.6 865 922
Foreign balance 6.1 15.7 69.3 77 67
Invisibles, net 151.3 126.5 121.4 142 154
Current account balance 157.4 142.2 190.8 219 221 Percentage changes
Goods and services export volumes 1.6 - 23.9 25.4 6.7 5.8 Goods and services import volumes 1.2 - 16.7 10.5 6.6 6.5
Export performance1 - 2.4 - 16.6 8.5 - 3.5 - 4.0
Terms of trade - 9.1 11.2 - 6.3 - 0.1 - 0.8
1. Ratio between export volume and export market of total goods and services.
Source: OECD Economic Outlook 88 database.
further extend the spending ceiling to FY 2014 and beyond, making tax increases necessary to meet the FY 2015 target. Indeed, the Strategy calls for multi-year revenue measures based on a comprehensive tax reform, including the consumption tax. The Strategy’s long-term objective is a primary budget surplus for central and local governments by FY 2020, putting the public-debt ratio on a downward trend during the 2020s.
… while the central bank has introduced new initiatives to support growth
The Bank of Japan reduced the policy interest rate from the 0.1% set in December 2008 to between zero and 0.1% in October 2010. In addition, it has launched a number of schemes to provide extra liquidity: i) in June 2010, it decided to supply up to 3 trillion yen (0.6% of GDP) in one-year loans at the policy rate to financial institutions for lending to companies in “growth areas”; ii) in August 2010, it created a second fixed-rate, funds-supplying operation that will lend money to financial institutions at the policy rate for six months, up to an aggregate amount of 10 trillion yen (2% of GDP); and iii) in October 2010, it announced a 5 trillion yen (1% of GDP) fund to purchase risk assets, including corporate debt and commercial paper. However, the scale of quantitative easing since 2008 remains well below that implemented by some other major central banks. Moreover, the Bank of Japan is committed to maintain these policies only until it forecasts price stability, rather than when price stability is actually achieved. Finally, the authorities intervened in foreign exchange markets on 15 September 2010 in the amount of 2.1 trillion yen (0.4% of GDP) for the first time in six years. This intervention immediately reduced the currency’s value relative to the dollar by almost 4% and prompted a rally in equity prices. By early October, though, the exchange rate had surpassed its pre-intervention level.
The expansion is projected to continue through 2012
Output growth is projected to slow in 2011 as the impact of the fiscal stimulus fades. However, private domestic demand is expected to sustain the recovery, with output growth reaching 1¾ per cent by the end of 2012.
Continued wage gains and a fall in unemployment to around 4½ per cent are likely to support private consumption. Business investment, whose share in GDP has fallen by nearly 3 percentage points since the 2008 crisis, should be a second source of growth. Relatively buoyant private domestic demand will be partially offset by declines in public spending under the Fiscal Management Strategy, while Japan is likely to lose export market share in the context of the strong yen. The pace of recovery will not be rapid enough to eliminate the output gap by 2012, thus keeping Japan in deflation.
Risks are largely related to fiscal policy, external demand and the yen
There is uncertainty about how the government spending limits will be divided by category and their impact on growth in 2011-12.
Nevertheless, such restraint will slow the run-up in the gross public-debt ratio, which is already the highest ever recorded in the OECD area, thus limiting Japan’s vulnerability to a rise in long-term interest rates. On the external side, growth is particularly sensitive to exchange rate developments. Continued yen appreciation could further restrain export growth and prompt firms to shift investment and hiring overseas.