Economists have revised up their near-term forecasts for Japan's economy as exports and production point to signs of bottoming out and government stimulus at home and abroad take effect, a Reuters poll showed. But the recovery is expected to be fragile and more a reaction to a sharp plunge in global demand late last year, not led by a genuine recovery in overseas demand for Japanese goods.
While Japanese growth is seen returning near its potential in fiscal 2010/11, deflation will persist for the next two years due to slack demand, say analysts. The poll of over 20 economists conducted May 7-13 showed the economy likely growing 0.1 percent in April-June and 0.5 percent in the following quarter.
Those were marked upgrades from last month's poll, when the consensus forecast was for a contraction of 0.4 percent and 0.1 percent in each quarter respectively, which would mark an unprecedented sixth straight quarters of contraction. "The economy has bottomed out and is heading for a rebound in the coming few quarters as stimulus steps take effect, exports recover and inventory adjustments run their course," said Naoki Iizuka, a senior economist at Mizuho Securities.
"The question now is whether the recovery can be sustained," he said, adding the rebound could be short-lived given that it will take time for Western economies to recover and for demand to return to a level seen before the global financial crisis. The expected growth would follow two straight quarters of big contractions. Economists polled by Reuters have forecast a 4.2 percent contraction in the first quarter, after a 3.2 percent contraction in October-December.
The Reuters consensus forecast published on Wednesday showed the economy may shrink 4.0 percent in the current year to next March after a 3.1 percent drop in gross domestic product (GDP) the previous year. The expected rate of contraction for 2009/10 was smaller than 4.5 percent seen in last month's poll. But it is bigger than a 3.3 percent contraction forecast by the government and a 3.1 percent decrease projected by the Bank of Japan.
Japan last month unveiled a record $158 billion stimulus spending package, the fourth one in the past year, to ease the pain from a collapse in global demand. Japanese industrial production rose for the first time in six months in March and is seen climbing further in coming months as exports stop falling, although shipments were nearly half the levels of a year earlier.
The benchmark Nikkei has gained over 30 percent since hitting a 26-year low in March, climbing to a six-month closing high this week on optimism about the US banking system and the economy, although investors say the market will need more evidence of a recovery for the rally to continue.
Analysts polled in the Reuters monthly survey were also cautious about the outlook with participants forecasting that growth will slow again in the final quarter this year. They expect growth to flatline in April-June 2010. The economy was expected to grow 0.9 percent in the year to March 2011, according the median forecast, lower than 1.3 percent projected last month and 1.2 percent forecast by the Bank of Japan (BOJ).
Takahide Kiuchi, chief economist at Nomura Securities, expects the world's second-biggest economy to shrink again slightly early next year, unless the government and the central bank take additional steps to shore it up.
"The economy may fall into a double-dip recession even though the next slump would be far shallower than the deepest ever contraction expected in the first quarter this year," he said. "You can't expect a recovery in exports to last long as the Western countries haven't solved problems involving the financial sector and asset deflation, while effects from stimulus steps will taper off before long."
Economists in the monthly poll expect the BOJ to keep interest rates near zero through 2010. But some analysts, including Nomura's Kiuchi, expect the BOJ to return to quantitative easing later this year to deter a deflationary spiral when the economy may start to slow again.
According to the median forecast, the core consumer price index, which in Japan excludes fresh food but includes energy, could be in negative territory through next year though gradually rising to -0.5 percent in October-December 2010. In last month's poll, the median estimate was for core consumer inflation to turn flat in that quarter.
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