Japanese Economic Recovery May Be Sluggish

In the first quarter of 2010, the Japanese economy expanded 5% annualized. Growth was mostly supported by strong exports and government stimulus. Yet, although the effects of higher overseas demand, especially from China, domestic subsides for cars and home appliances have been positively influencing the broader economy, a sustainable recovery is probably beyond reach.

First, the Chinese economy, Japan's main partner, has been boosted by a huge fiscal and monetary stimulus which it is likely to vain in the next few months. Second, the 20% appreciation of yen against the euro
is making Japanese products more expensive and less competitive in the Euro Zone.  And even though only 12% of shipments go to Europe, a series of austerity measures imposed by many European governments in order to fight fiscal deficit will certainly have a negative impact on Japanese exports. Moreover, while Europe isn’t Japan’s largest market, China sends most of its products there. Undoubtedly, lower demand for
Chinese products overseas may translate into drop in Chinese purchasing power and decrease in sales of Japanese products in China.

Looking further, although Japanese companies have recently recorded sizable profits from exports they are still reluctant to invest. Big conglomerates are cautious because domestic demand has been weak. And smaller companies find difficult to get capital as banks are reluctant to lend even if they are full of cash from huge pools of savings. In fact, the latest attempt by the Bank of Japan to provide unlimited cash for banks in the form of quantitative easing failed to bring positive results. Japanese banks are known for being risk averse and prefer to put their money in low yield risk free government bonds (JGB's). And without solving this problem Japan may not be able to break the spiral of deflation and low productivity which are formidable barriers for sustainable growth.

Anna Fedec, contact@tradingeconomics.com
6/14/2010 5:55:27 PM