Japan: Country Economic Forecast: 11 Nov 2011

GDP is likely to have grown by over 1% in Q3 as activity rebounded from the natural disasters earlier this year. However, monthly indicators suggest the recovery has been losing momentum and with global conditions also deteriorating the outlook for Q4 and early 2012 is much more subdued. Industrial output fell a surprisingly sharp 4% in September and, while some recovery is likely in October and November, industry still faces strong headwinds from slackening external demand growth and a strong yen. Consumer data have also weakened recently. Consumer spending edged lower in July and August and retail sales fell steeply in September for the second straight month, despite a decline in unemployment. And although there is some evidence from the labour market data that reconstruction spending is benefiting the economy, construction sector data are mixed with September seeing sharp declines in housing starts and construction orders. We have lowered our GDP forecasts slightly this month to -0.7% for 2011 and 2.0% for 2012, and risks remain skewed to the downside. These risks prompted the authorities to intervene aggressively in the currency market at the end of October, weakening the JPY by some 4%. More of the same may well be needed, especially given the gloomy international backdrop.