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Japan Business Forecast Report Q2 2011
Business Monitor International, March 2011, Pages: 42
Fiscal Crisis Risks Growing
Japan’s economy is likely to experience a strong H111 as the export engine revs in response to a pick-up in external demand. However, we do not believe an improvement in near-term growth will be nearly enough to improve the government’s debt dynamics, which are becoming increasingly unsustainable. We have written on numerous occasions that we expect some form of credit event/ debt restructuring/excessive monetisation (or a combination of all three) to take place over the coming years as the debt load is too large to pay off by normal means and will soon become too large to service. As we delve deeper into the fiscal accounts, our conviction only strengthens.
Japanese Prime Minister Naoto Kan’s position is looking increasingly untenable and we believe he could be forced to leave office within the next few months if his popularity falls further. His approval rating has seen ups and downs since he took office in June 2010 and, as recently as last September, it was above 60%. However, a poll conducted in the first week of February showed his support went down to 27%. A separate poll even put Kan’s backing at 21.3%. Given that most Japanese premiers come under pressure – from either the public or their party – to resign when their approval rating drops below 30%, Kan is clearly in vulnerable territory. However, even if Kan is replaced, his successor is unlikely to fare better, given the extent of Japan’s economic woes – namely weak growth, ongoing deflation and a colossal debt burden.
Despite the widely expected quarterly contraction in Q410, Japan’s near-term growth prospects are turning up, led by a brighter external outlook and a revival in private and public sector investment. For these reasons, we are comfortable maintaining our real GDP growth forecast of 1.6% for 2011. Nevertheless, fundamental concerns regarding the country’s poor demographics and dire fiscal accounts will continue to cast a heavy shadow over the longer-term outlook. Indeed, despite the large amount of public sector assets that the Japanese government holds, we estimate that its net debt situation is the worst in the OECD at roughly 135% of GDP when public corporations are included. We continue to see the government eventually embarking on debt monetisation or restructuring as the debt burden becomes unsustainable.
Japan’s business environment is supported by a strong rule of law, stringent property right protection and excellent infrastructure. However, corruption within public sector procurement, a relatively inflexible labour market and high corporate tax rates are impediments to investment. The government’s reluctance to accommodate foreign investment in a wide range of local industries acts as an impediment to the development of the business environment.
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