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Thursday, Danske Bank said in a report that the Japanese economy is poised for a strong recovery in the coming quarters, although it expects the pace of the recovery to cool going into 2010.
The Japanese economy has so far recovered strongly, with GDP rebounding to an annualized 2.4% quarterly growth in the second quarter and expected to rise by more than 5% in the third quarter. The firm attributed the strength of the Japanese recovery to a strong recovery in exports, especially to the rest of Asia, lower inventory cuts, fiscal stimulus measures and improved financial conditions.
The sharp rebounding of exports has largely been driven by exports to the rest of Asia, and especially to China. Exports to Asia, which accounts for about 50% of all Japanese exports, were up 15% on quarter in the second quarter. Also, the 'cash for clunkers' program in place around the world has boosted demand for two of Japan's most popular export articles, autos and electronics.
However, the firm does not expect the strong growth in exports to be sustained, and expects exports to Asia to cool by the final quarter of 2009. But this should be partly offset by stronger exports to the recovering economies of Europe and the U.S..
Although inventories are still being cut, the pace has eased substantially, and the auto industry is expected to lead industrial production in the coming quarters. However, the firm does not expect inventory to add substantially to growth next year and said that development in industrial activity next year will largely depend on the development in final demand.
Two fiscal stimulus packages have been adopted in Japan. The first involved one-off tax cuts to households in the second quarter, while the second was directed to boost public investments in the second-half of 2009. The firm expects fiscal policy to strongly assist the recovery in the coming months, although private consumption is likely to wane as tax cuts are withdrawn.
Although recovery appears to be strong in the short-term, the firm maintained a cautious outlook for next year, as by then exports to Asia are expected to ease and the effects of fiscal stimulus measures are likely to fade. The firm said that the pace of Japan's recovery next year will be dependent upon the strength of the European and U.S. economies, and that overall the recovery remains on track, although the pace of the recovery is expected to be slow. Further, employment was forecast to stabilize in the current quarter and rise in the following quarter.
The report also voiced concerns over increasing deflationary pressures, with the headline inflation declining below 2% annually in July, while core consumer prices, which excludes the volatile food and energy components also declining substantially. The firm added that the possibility of Japan being pushed back into a destructive deflationary spiral cannot be completely ignored.
With negative inflation forecast for most of 2010, the report said that the Bank of Japan is unlikely to hike interest rates until very late in 2010 or possibly even until 2011. For that reason, Japan is expected to lag in the coming monetary tightening cycle, with its Asian neighbors China, South Korea and Taiwan, all poised for monetary tightening by early 2010.
However, the firm expects the central bank to cut off some of its unconventional easing measures like the purchase of commercial papers and corporate bonds, as early as the first quarter of 2010. The firm notes that demand has waned for the commercial paper program and the corporate bond program, and that the easing measures could be pulled back without any major impact on credit conditions.
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