TOKYO: Japan’s government has raised its economic growth forecast for the next fiscal year, helped by an expected boost from a US$122 bil (RM505 bil) fiscal package that would help cushion the hit from weaker global demand.
The economy is now expected to expand 1.4% in price-adjusted real terms in the fiscal year starting April 2020, according to the Cabinet Office’s projections, approved by the Cabinet on Dec 18.
That is an upgrade from the government’s previous forecast of 1.2% growth issued in July. The government kept its estimated 0.9% growth for the current fiscal year ending in March 2020.
The upgrade largely stems from an improvement in domestic demand due to stronger corporate investment and a boost to growth from public spending from the fiscal package approved by the Cabinet in December.
The government expects capital spending to grow a robust 2.7% next fiscal year, compared to 1.9% in the previous assessment in July. Public demand is seen adding 0.5 percentage point to GDP growth in fiscal 2020, up from 0.2 percentage point seen previously.
The boost from the fiscal package is expected to more than offset weakness in external demand as slowing global growth threatens to leave a deeper mark on the economy.
The government expects a 0.1 percentage point drag from external demand next fiscal year, compared to a positive 0.2 percentage point contribution seen previously.
The downgrade largely stems from a weaker rebound in exports, which the government sees expanding at a pace of 2.4% next fiscal year, down from 4.3% seen previously.
The government’s projections come as the Bank of Japan is expected to keep monetary policy on hold on Dec 19 as the fiscal package and progress in US-China trade talks take some immediate pressure off the central bank to support growth.
The Cabinet Office projected overall consumer inflation, which includes volatile fresh food and energy costs, at 0.6% for this fiscal year and 0.8% for the following year – remaining far from the BOJ’s elusive 2% price target.
Japan’s economy expanded at an annualised 1.8% in the third quarter because of stronger consumer and business spending, but analysts expect a contraction in the current quarter due to the increasing external and internal pressures.
Weighing on the outlook are a slowdown in China’s economy and a nationwide sales tax hike in October, which appears to have hit private consumption harder than policymakers initially thought.
The Cabinet Office said private consumption will grow just 0.6% in fiscal 2019, down from 0.9% seen in the previous assessment in July, due to a decline in consumer sentiment and lower summer bonuses.
For fiscal 2019 and fiscal 2020, the Cabinet Office forecast nominal economic growth of 1.8% and 2.1%, respectively. Higher nominal growth estimates point to government expectations for greater tax revenue.
Meanwhile, a former Japanese central banker said the country’s economy may already be in a mild recession and will rebound only modestly next year, and this will force the Bank of Japan (BoJ) to maintain its huge stimulus despite the rising costs.
Former BoJ economist Hideo Hayakawa said on Dec 18 that given its dwindling ammunition, the BOJ is likely to hold off on expanding stimulus unless an external or market shock deals a more severe blow to the economy.
Hayakawa, who retains close contact with incumbent central bank policymakers, said prolonged economic stagnation will, however, also prevent the central bank from normalising crisis-mode policies any time soon.
“With inflation very distant from the BOJ’s 2% target, the BOJ won’t be able to dial back stimulus any time soon,” Hayakawa said.
“The best it can probably do is to ‘stealth’ normalise,” or to continue quietly tapering asset purchases, he added.
The BOJ is set to keep policy steady on Dec 19 as signs of progress in US-China trade talks take some pressure off the central bank to tap its depleted policy tool-kit.
Japan’s economy grew by an annualised 1.8% in the third quarter, marking the fourth straight quarter of expansion, gross domestic product (GDP) data showed.
But the strong GDP figure contradicts other data painting a weaker picture of the economy, such as slumping exports and output blamed on slow global demand, said Hayakawa, now a senior economist at private think tank Fujitsu Research Institute.
While Japan’s economy is expected to rebound next year, any pick-up will be modest as lingering overseas uncertainties and slow wage growth weigh on exports and consumption, he said.
Capital expenditure is also unlikely to strengthen much as many firms already spent years ramping up spending, he added.
“It’s quite clear Japan is already in mild recession,” said Hayakawa, a former top BOJ economist. “The economy will rebound sometime in the first half of next year, but in such a small way that very few in the public would feel it.”
While the United States and China move toward de-escalating their bitter trade war, slumping global manufacturing activity has already taken a toll on Japan’s export-reliant economy, the world’s third largest.
Factory output posted its largest fall in two years in October and big manufacturers’ business sentiment sank to a near seven-year low in the fourth quarter. Exports also slipped for a 12th straight month in November.
Many analysts expect the economy to contract in the current quarter as a sales tax hike in October cools consumption. – Bernama
