Briefing Notes for the Launch in Tokyo, March 2009
Impact: the return of recession
- Japanís economy contracted after growth of 2.4% in 2007. Business investment and export
demand plunged, and consumer confidence and private consumption deteriorated. The
economy contracted by 3.3% on 4th quarter 2008 on quarter-to-quarter basis, reducing the
annual growth rate to -0.7% in 2008.
- The global financial crisis appeared to have limited impact during 2007, yet it had already
begun to erode business confidence at the end of 2007, reinforcing the deterioration of
business investment during 2008.
- Private investment, which suffered a major setback in 2007, made some recovery during
2008, but fell again towards the end of the year reflecting the falling consumer confidence.
- Increased production costs, particularly due to the surge in commodity prices, as well as
falling demand, squeezed profits in the business sector. Corporate profit plunged by annual
rate of 22.4% in the third quarter of 2008 Ė the largest fall in 7 years.
- Household consumption weakened in the absence of consumer confidence and income
growth. In addition to sluggish wage growth, surge in oil prices pushed up consumer price
during 2008, reducing the real income. Labour market condition eased and unemployment
rate crept up as recession deepened and firms start cutting labour force, particularly part-time
workers. Unemployment and sluggish wage growth further dampened consumer confidence
and failed to support private consumption
- Corporate price inflation, which tracks changes in wholesale prices, recorded a hike of more
than 7% in the third quarter 2008, reflecting the high price of oil and commodities.
- Corporate price inflation pushed up the consumer price to 1.4% in 2008, which is about 10
year high for Japan.
- Falling oil price in the second half of 2008 and recession brought back the concern on
deflation which haunted Japan for a decade.
- The fall of U.S. export demand was partly offset by the solid demand from the other parts of
the world at the beginning of 2008.
- The recession in U.S. and Europe reduced their demand for Asian products, which eventually
led to a significant reduction in Asiaís demand on Japanese export products. As the demand
from Europe and Asian economies fell, export begun to shrink (in yen term) in the second
quarter of 2008, recording a contraction by 26.5% in November 2008.
- Trade surplus plunged. Together with an increase in imports, trade surplus shrank as much
as 67% in 2008, largest fall in history.
- Fall of demand from Asian countries have significant impact on Japanís export growth, as
almost half of Japan's exports are directed to Asia. In particular, as of 2008, around 20% of
Japanís export went to China and Hong Kong, China, In dollar term, export contracted at
annual rate of 15% in November, of which almost half is attributable to the contraction of the
demand from Asia.
- The deepening global downturn led macroeconomic policies of the three economies in one
direction: supporting domestic demand and ensuring liquidity in the financial sector. The
budget balance is expected to worsen in all these economies. Their weakening economies
will limit revenue growth and increase the need for fiscal expenditure.
- Public debt stood at 170% of GDP in 2008. While budget deficit narrowed in recent years,
fiscal consolidation was put on hold. The proposed budget for fiscal year 2009 indicates an
increase of expenditure by 7%. The deteriorating economic outlook has led the Government
to make economic recovery a priority over fiscal consolidation for the time being.
- The government announced plans for economic stimulus package of approximately 75 trillion
yen in total, consisting of 12 trillion yen (about 2% of GDP) fiscal measures and 63 trillion yen
financial measures within the two supplementary budgets for fiscal year 2008 and the budget
for fiscal year 2009. The package embraces three components; assistance for consumers,
assistance to small and medium enterprises, and revitalizing regional economies.
- The Bank of Japan cut the target for the overnight call rate in October 2008, from 0.5% to
0.3%. After the U.S. Federal Reserve Bank cut its target for the federal funds rate to between
zero and 0.25%, the Bank cut its target rate to 0.1% in December.
- The past experience of extremely accommodative monetary policy cast doubt on the
effectiveness of the rate cut to prevent a credit crunch, and the BOJ explored other measures
to ensure liquidity for the corporate sector, especially small and medium-sized businesses.
- To encourage banks to maintain funding for the corporate sector, the BOJ relaxed
requirements for BOJís loans to banks (so that banks could get loans with lower-rated
corporate debts as collateral). It also announced other non-traditional measures such as
purchase of corporate bonds and commercial paper to reduce corporate financing costs.
- Recession is expected to continue in the coming year as external demand deteriorates and
private demand weaken further. The economy contracted by 0.7% in 2008 and is expected to
contract by 2.5% in 2009.
- Inflation rate is estimated to fall from 1.4% in 2008 to -0.2% in 2009, raising concern on the
return of deflationary pressure.
- Medium term policy challenges mount Ė fiscal consolidation and reform of social welfare
system. With fast aging population, it is a daunting task to restructure social safety net which
is sustainable, resilient to large shocks and protect vulnerable groups.