Solid Recovery for Japan, But Europe Dampens Outlook

by CFO Innovation Asia Staff, 13 June 2012

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topics:
Finance and Banking

tags:
economic outlook Euro Crisis GDP IMF investor confidence

Japan is experiencing a solid recovery following the March 2011 Great East Japan earthquake, but the European debt crisis is likely to dampen demand for the country’s exports, and weigh on business sentiment, says the IMF in its annual health check of the world’s third largest economy.

The IMF says that Japan's recovery will be sustained by reconstruction spending and stronger private consumption. Moreover, the exchange rate has appreciated over the past year partly because of safe-haven capital inflows, and IMF analysis suggests that the yen is moderately overvalued from a medium-term perspective.

On this basis, the IMF expects real GDP growth to reach about 2 percent in 2012 and slow slightly to 1¾ percent in 2013, with headline inflation remaining near zero percent. Risks to the outlook have shifted decidedly to the downside with the turmoil in Europe intensifying and other advanced and key emerging market economies showing signs of slowing.

To address longstanding challenges of high public debt, low growth, and deflation, the IMF says Japan needs to move forcefully on many fronts to take advantage of synergies among policies.

"The immediate priority is to tackle Japan’s deep rooted fiscal problems. Net public debt (125 percent of GDP) has increased ten-fold over the last two decades against the backdrop of a rapid rise in social security spending," says the IMF in a statement.

Passage of the current tax and social security reforms is, thus, crucial to demonstrate a commitment to fiscal reform and sustain investor confidence, notes the IMF. Reducing debt to sustainable levels, however, will require additional measures to achieve an overall fiscal consolidation of 10 percent of GDP over the next decade.

IMF adds that a bold and comprehensive package of structural reforms is necessary to not only raise potential growth, but also to help reduce the public-debt-to-GDP ratio and to exit deflation.

"Reforms should focus on the most important constraints to growth, including the decline in the labor force due to aging, low female labor force participation, domestic sector regulations, and limited availability of risk capital," says the IMF.

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