Japan: Country Economic Forecast: 17 Jan 2012

Japan's GDP is likely to have shrunk in 2011Q4, with the rebound from natural disasters earlier in the year running out of steam. GDP for the whole year is estimated to have contracted by around 1%. Industrial activity has been volatile in recent months, in part reflecting external factors such as floods in Thailand. But the underlying picture remains of a sector under pressure, with dwindling orders resulting from the slowdown in the global and regional economy. Against this background, investment activity remains weak. Business investment fell in 2011Q3 for the fourth straight quarter and government investment is likely to have declined in 2011 despite the reconstruction needs resulting from last March's natural disasters. Consumer indicators have also fluctuated but, overall, look subdued. Retail sales were weak in November and the labour market is not supportive with cash earnings continuing to decline and employment broadly flat. We forecast a rise in consumer spending of just 1.5% in 2012. Our forecast now looks for GDP growth of 1.4% in 2012, rising to 3.1% in 2013. But downside risks are substantial, especially given the international financial situation and the uncertainties in China. We expect the authorities to continue to hold down the yen through intervention and further stimulus measures may also be needed.