Japan expects economy to recover in fiscal 2015 after 2014 slump

Tokyo

JAPAN'S economy will grow by 1.5 per cent in inflation-adjusted "real" terms in the fiscal year from April 1, said Tokyo on Monday, in an upgrade of its previous forecast of 1.4 per cent.

But analysts pointed out that the rate of economic expansion and the projected inflation rate for next year will still fall short of targets set under Prime Minister Shinzo Abe's economic policy.

In the current fiscal year to March 31, the world's third largest economy is forecast to contract by 0.5 per cent in real terms, compared to a previously forecast expansion of 1.2 per cent. This points to the severe impact of last April's sales tax hike.

Nominal growth is projected to be 1.7 per cent in the current fiscal year, and 2.7 per cent in fiscal 2015. The fact that real growth rates are now projected at well below nominal ones means the economy has returned to a more "normal" state, analysts said.

Real growth is normally smaller than nominal growth in an economy where inflation is present. But in a Japan hobbled by persistent deflation over many years, the reverse has been true: real growth has outstripped nominal growth after adjusting for price declines.

Although inflation has returned, the impact of the aggressive monetary easing by the Bank of Japan (BOJ) has meant that the rate of price increases in the current fiscal year and in fiscal 2015 are expected to fall significantly short of the BOJ's targeted 2 per cent annual price rise.

A Cabinet Office official was quoted by Kyodo news service as having said: "The consumer price index is expected to gain 1.2 per cent in fiscal 2014, excluding the effects of the three-percentage-point consumption tax hike last April, and to climb by 1.4 per cent in fiscal 2015."

Mr Abe's decision at the end of last year to postpone a scheduled second increase in Japan's national sales tax is expected to boost personal consumption in fiscal 2015, after an initial increase in the tax last April helped push the country into recession.

Corporate capital spending is also forecast to pick up in the new fiscal year, on the back of increased company profits from a weaker yen and consequent export boost, said the Cabinet Office when it presented the latest economic forecasts.

At the end of last month, the Abe Cabinet approved an emergency economic stimulus package worth around 3.5 trillion yen (S$38.9 billion), with the intention of boosting households and regional economies that had been hurt by prices rising faster than wages and by a jump in prices of imports.

Minister in charge of economic and fiscal policy Akira Amari said on Monday that real wages should turn positive in fiscal 2015 after some 18 months of continuing decline, owing to inflation rising faster than earnings in Japan. This change should help consumption and growth, he suggested.

The latest growth forecasts come as government ministers and the ruling coalition parties approved a 96.34 trillion yen budget proposal for the 12 months starting April 1 at a meeting in Tokyo on Monday, Finance Minister Taro Aso told reporters. Mr Abe's Cabinet is scheduled to meet on Jan 14 to formally adopt the budget.

With corporate profits set to improve, the Cabinet Office said that capital spending, which Mr Abe sees as a pillar of economic growth, will expand 5.3 per cent in fiscal 2015 in real terms, up sharply from the 1.2 per cent increase estimated for the current fiscal year.

Consumer spending, which accounts for around 60 per cent of Japan's gross domestic product (GDP), is expected to contract 2.7 per cent in fiscal 2014, before recovering to a 2.0 per cent increase in fiscal 2015, the government said.

Exports are likely to grow by 8.6 per cent in fiscal 2015, up from a 6.8 per cent expansion this fiscal year, owing in part to the yen's fall, while imports are forecast to increase 2.5 per cent in fiscal 2014 and 3.5 per cent in fiscal 2015.

Meanwhile, the Cabinet Office forecast the unemployment rate to improve slightly from current levels - to 3.6 per cent in fiscal 2014 and to 3.5 per cent in fiscal 2015.