Japan: Country Economic Forecast: 08 Feb 2012

Oxford Economics
February 8, 2012
11 Pages - SKU: OFE6800402
Countries covered: Japan

We estimate that Japan's GDP fell by 0.5% in 2011Q4, resulting in a drop of 1% for the year as a whole and leaving GDP more than 4% below its peak level of 2008Q1. The Q4 slump can in part be put down to further external shocks, including the flooding in Thailand, and manufacturers' forecasts suggest some rebound from these setbacks in 2012Q1. But the underlying fundamentals still point to growth staying sluggish over the next year. Consumer spending remains weak, with wage growth stagnant, and investment spending, including residential investment, is also still subdued. This leaves Japan heavily dependent on external demand, but recent trends here have also been discouraging. Japan's export growth has lagged behind growth in its key export markets, with further downside risks in the shape of the Eurozone financial crisis and a possible sharper slowdown in China. Although we forecast GDP growth at 1.3% this year, this would still leave a substantial output gap of 3% of GDP, maintaining deflationary pressures in the economy. The fiscal situation remains too precarious to allow any significant stimulus, leaving monetary policy to bear the burden of supporting the economy. This year could see Japan shifting from merely halting yen appreciation to encouraging depreciation.

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