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Economics: Japan
Economics – Markets – Strategy
JP: What virtuous cycle?
• In the past three months, the markets have swung from worrying about a
recession to factoring in a rate hike by the BOJ by the year-end. Neither
scenario will materialize
• There will be no recession but growth will fall to 1.6% in 2008 from 2% in
2007
• This year, the 1.0% (QoQ, sa) expansion recorded in 1Q08 will be as good
as it gets. The central bank’s “virtuous cycle” between exports, production,
profits and business and household spending has gained no traction. The
gradual decay in export growth since early 2006 has become more
pronounced, owing to cooler demand from Asia and the US. Corporate
margins are being squeezed by higher fuel and commodity prices.
Households have little prospect of seeing wage growth emerge from longterm
stagnation; as inflation rises, the likelihood is for consumers to tighten
their belts
• In this context, the Bank of Japan (BOJ) has no room to lift the overnight
call target rate of 0.50% this year. Rising inflationary expectations, however,
raise the odds that the central bank could seize the opportunity to lift
interest rates if economic data improves. This could come as early as 1Q09;
although we have ‘downgraded’ the annual average YoY growth rate to
1.6% for 2009, in QoQ terms growth should actually average a relatively
stronger 0.7%, versus a 0.3% QoQ average this year
JAPAN
The global
electronics cycle
remains in a slump
Exports will keep slowing…
In 1Q08, exports rose by a surprisingly strong (seasonally adjusted) 4% QoQ,
despite the yen having appreciated by about the same degree in real tradeweighted
terms. In the next six months, we expect the yen to give back some of
those gains, with our forecast being for USD/JPY to finish the year at 107.00. But
this will mean little for the export growth outlook, in the face of what will be
continued weakness in the global
electronics cycle. The hopeful
pick-up in the US semiconductor
equipment book-to-bill ratio
in 4Q07 has all but dissipated,
and as at Apr08 the ratio is
almost back down to where
it was six months ago - a subparity
0.81. Given that the bookto-bill
ratio tends to lead Japan’s
export cycle by about three
to six months, shipments are
likely to remain soft for the
remainder of the year (Chart
1).
Further putting the brakes on
export growth will be the
slowdown in global growth
-10
-15
Lim Su Sian • (65) 6878 1740 • limsusian@dbs.com
Chart 1: Electronics cycle still in the doldrums
% YoY Ratio
25
20
15
10
5
0
-5
US semi BB ratio
(RHS)
Merch exports
Latest: Apr08
Jan-00 Jul-01 Jan-03 Jul-04 Jan-06 Jul-07
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
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