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Wednesday, May 23, 2012
Economic uncertainties ahead
The Cabinet Office's preliminary report on May 17 stated that Japan's gross domestic product in the January-March period increased by 1 percent from the previous quarter in real terms or an annualized 4.1 percent. This performance, better than expected by private-sector analysts, is mainly attributed to the acceleration of public-works projects for reconstruction in the areas damaged by the 3/11 disasters. But the government and enterprises should guard against several downside risks.
Investment in public works projects increased 5.4 percent, the first rise in three quarters. Exports, which were stagnant in the previous quarter, rose 2.9 percent as exports to the United States picked up. Consumer spending expanded 1.1 percent — a rise for four consecutive quarters.
It is reported that robust public-works projects have even caused a labor shortage in the construction industry in the disaster areas. But there is a view that demand from reconstruction public works projects will start gradually decreasing after peaking in the April-June period.
Revival of government subsidies for the purchase of eco-friendly cars and increased spending for entertainment such as visits to amusement parks and sports facilities helped push up consumer spending, which accounts for about 60 percent of GDP. But it is expected that the budget of some ¥300 billion for eco-friendly car purchase subsidies will run out in summer. If this happens, the economy will lose a pillar that is underpinning it. Another worrying factor is a 3.9 percent drop in equipment investment and a 1.6 percent fall in housing investment.
If further political confusion occurs in Greece, the European sovereign debt crisis will intensify and have undesirable effects on Japan. Demand in foreign exchange markets for the yen, regarded as a stable currency, will increase, raising the yen's value. If the European crisis greatly dampens Chinese exports to Europe, Japan's exports to China will suffer. Both the strong yen and weak exports will cause hardships for export-oriented enterprises.
The government needs to create an environment that will help increase consumer spending and capital investment. Export-oriented firms need continued efforts to develop competitive and attractive products. Manufacturers will have to work out plans to overcome expected power shortage this summer, such as increasing production in areas not severely affected by power shortages and also increasing production in autumn to compensate for lower production rates due to energy conservation efforts in summer.