Perspectives on the Japanese economy

- "The Japanese economy will not experience any noteworthy change in the next two years:
• Fiscal policy will stimulate household demand at least until next year. Although considered by the government, a sweeping tax reform (with VAT doubled in exchange for a cut in direct taxes) remains up in the air after the change in majority in the upper house. Without this reform, the deficit will widen further and drive the public debt towards 213% of GDP by 2012.
• Domestic savings will finance as usual this additional public debt, in particular corporate savings, and corporate debt will fall to 82% of GDP. Productive investment will admittedly increase, but far less than profits, which will be driven by substantial productivity gains.
• Population ageing will weigh negatively on residential investment, and positively on the unemployment rate. Nonetheless, the household savings rate will not decrease, as preference for the future remains strongly anchored in the behaviour of economic agents (real balance, substitution and Ricardian effects verified).
• Consumer prices will stop declining but nonetheless the country will not pull out from deflation (the GDP deflator will fall and the BoJ’s inflation target will not be met), and accordingly a tightening of monetary policy is unlikely.
• Such a growth regime (+1.3% of GDP in 2011; +1.7% in 2012) guarantees a stable and substantial current-account surplus (3% of GDP). Although desired by monetary authorities, the yen’s depreciation will therefore be jeopardised to a large extent. In view of the new Chinese exchange rate policy, an appreciation is actually far more likely."

Natixis Flash Economics 436 20100902

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