TOKYO, Oct 30 (Reuters) - The following is the text of the Bank of Japan's half-yearly economic and price outlook report for October:
The Bank's View
The global economy has been gradually emerging from a grave situation of panicked contraction of economic and financial activity induced by the financial crisis that broke out in the autumn of 2008. Global financial markets have been improving, and the global economy has picked up.
However, the stabilization of global financial markets and the global economy to date has largely been achieved through the effects of large-scale policy measures by public authorities around the world as well as progress in various adjustment processes in the private sector.
The outlook for the global economy will hinge, among other things, on the possible consequences of balance-sheet adjustments in the United States and Europe and developments in emerging economies, which have been contributing significantly to the current recovery in the global economy. The uncertainty involved in these factors remains high, although it has decreased somewhat. Against this backdrop, in considering the outlook for economic activity and prices, the baseline scenario and various risk factors should be carefully examined.
Outlook for Economic Activity
In the first half of fiscal 2009, Japan's economy headed toward a pick-up following the rapid and substantial deterioration in the second half of fiscal 2008. Exports and production rose considerably against the backdrop of progress in inventory adjustments both at home and abroad as well as a recovery in overseas economies, especially emerging economies. Public investment continued to rise as the government's economic policy measures were implemented.
However, business fixed investment continued to decline substantially, reflecting mainly the severe corporate profit situation and low capacity utilization. Private consumption remained generally weak amid the increasingly severe employment and income situation, although there were signs of a pick-up in durable goods consumption largely owing to the effects of various policy measures.
As with other advanced economies, the outlook for Japan's economy from the second half of fiscal 2009 through fiscal 2011 is likely to continue to hinge greatly on developments in the global economy. Japan's economy has started to pick up, and in the second half of fiscal 2009 it is likely to improve gradually on the back of improvements in overseas economies as well as the effects of economic policy measures. While Japan's economy is expected to remain on a recovery trend in fiscal 2010, the pace of improvement is likely to be moderate until around the middle of fiscal 2010. This is because the pace of recovery of the global economy is likely to remain moderate and also because, in Japan, pressures to adjust employment and wages are likely to remain, while effects of demand-boosting policy measures wane. Thereafter, as balance-sheet adjustments in the United States and Europe make fair progress, improvements in the corporate sector originating from exports are likely to spill over to the household sector. Therefore, in fiscal 2011 the growth rate of Japan's economy is likely to reach a level clearly above the potential growth rate.'
The key features of the outlook are as follows.
Overseas Economies
It is assumed that overseas economies will recover moderately on the whole. In the second half of fiscal 2009, U.S. and European economies are expected to improve on the back of demand-boosting policy measures and progress 1ll inventory adjustments. Emerging and commodity-exporting economies are likely to maintain high growth. Economic stimulus measures are likely to have stronger effects in these economies because balance-sheet problems in these economies are relatively minor to start with and growth is likely to be boosted by the effects of capital inflows and a recovery in exports to advanced economies, While the global economic recovery might temporarily lose momentum sometime in fiscal 2010 ref1ecting the waning effects of demand-boosting policy measures in each country, it is unlikely that the recovery trend of the global economy will come to a halt, for the following reasons. First, authorities in the United States and Europe are taking a stance of supporting the economic recovery through macroeconomic policies. And second, domestic demand is potentially strong in emerging economies. Therefore, the growth rate of the global economy is expected to gradually rise through fiscal 2011. Nevertheless, it is most likely that the pace of economic recovery will remain modest on the whole as the global economy is in a recovery process while adjustments are made to various excesses that had accumulated until around the mid-2000s, and the effects of balance-sheet adjustments in the United States and Europe, in particular, are likely to persist.
The Corporate Sector
In the manufacturing sector, exports and production have been increasing because of the progress in global inventory adjustments and stronger demand induced by various policy measures. However, the level of production is sti11low due mainly to the earlier plunge in production. While the pace of increase in production might temporarily slow as the effects of inventory adjustments and of demand-boosting policy measures at home and abroad wane, the rising trend of production is expected to continue as long as the moderate recovery trend of the global economy continues. In the absence of a substantial decline in firms' expectations of medium- to long-term growth of global demand, business fixed investment is also expected to recover gradually with the increase in production and recovery in corporate profits. In contrast, recovery in the nonmanufacturing sector and for small firms is likely to lag behind that in the manufacturing sector, since the pursuit of cost cutbacks in the manufacturing sector will put downward pressure on demand, and the household sector will face a severe situation, as will be discussed below.
The Household Sector
Private consumption, while likely to continue to show signs of recovery with regard to consumer durable goods due to the effects of various policy measures, will probably remain generally weak amid the severe employment and income situation. Recently, against the 3 backdrop of increased exports and production, there have been changes in some employment indicators, such as an increase in non-scheduled hours worked and a leveling out of the ratio of new job offers to applicants. However, the slack in the labor market is likely to continue for some time, and the severe situation for wages, particularly for bonus payments, will continue. Since improvements in the employment and income situation tend to lag behind any recovery in corporate profits, it is highly likely that a sustainable recovery in private consumption will be in sight in the latter half of the projection period. Keywords: JAPAN ECONOMY/BOJ FORECAST
COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
The Bank's View
The global economy has been gradually emerging from a grave situation of panicked contraction of economic and financial activity induced by the financial crisis that broke out in the autumn of 2008. Global financial markets have been improving, and the global economy has picked up.
However, the stabilization of global financial markets and the global economy to date has largely been achieved through the effects of large-scale policy measures by public authorities around the world as well as progress in various adjustment processes in the private sector.
The outlook for the global economy will hinge, among other things, on the possible consequences of balance-sheet adjustments in the United States and Europe and developments in emerging economies, which have been contributing significantly to the current recovery in the global economy. The uncertainty involved in these factors remains high, although it has decreased somewhat. Against this backdrop, in considering the outlook for economic activity and prices, the baseline scenario and various risk factors should be carefully examined.
Outlook for Economic Activity
In the first half of fiscal 2009, Japan's economy headed toward a pick-up following the rapid and substantial deterioration in the second half of fiscal 2008. Exports and production rose considerably against the backdrop of progress in inventory adjustments both at home and abroad as well as a recovery in overseas economies, especially emerging economies. Public investment continued to rise as the government's economic policy measures were implemented.
However, business fixed investment continued to decline substantially, reflecting mainly the severe corporate profit situation and low capacity utilization. Private consumption remained generally weak amid the increasingly severe employment and income situation, although there were signs of a pick-up in durable goods consumption largely owing to the effects of various policy measures.
As with other advanced economies, the outlook for Japan's economy from the second half of fiscal 2009 through fiscal 2011 is likely to continue to hinge greatly on developments in the global economy. Japan's economy has started to pick up, and in the second half of fiscal 2009 it is likely to improve gradually on the back of improvements in overseas economies as well as the effects of economic policy measures. While Japan's economy is expected to remain on a recovery trend in fiscal 2010, the pace of improvement is likely to be moderate until around the middle of fiscal 2010. This is because the pace of recovery of the global economy is likely to remain moderate and also because, in Japan, pressures to adjust employment and wages are likely to remain, while effects of demand-boosting policy measures wane. Thereafter, as balance-sheet adjustments in the United States and Europe make fair progress, improvements in the corporate sector originating from exports are likely to spill over to the household sector. Therefore, in fiscal 2011 the growth rate of Japan's economy is likely to reach a level clearly above the potential growth rate.'
The key features of the outlook are as follows.
Overseas Economies
It is assumed that overseas economies will recover moderately on the whole. In the second half of fiscal 2009, U.S. and European economies are expected to improve on the back of demand-boosting policy measures and progress 1ll inventory adjustments. Emerging and commodity-exporting economies are likely to maintain high growth. Economic stimulus measures are likely to have stronger effects in these economies because balance-sheet problems in these economies are relatively minor to start with and growth is likely to be boosted by the effects of capital inflows and a recovery in exports to advanced economies, While the global economic recovery might temporarily lose momentum sometime in fiscal 2010 ref1ecting the waning effects of demand-boosting policy measures in each country, it is unlikely that the recovery trend of the global economy will come to a halt, for the following reasons. First, authorities in the United States and Europe are taking a stance of supporting the economic recovery through macroeconomic policies. And second, domestic demand is potentially strong in emerging economies. Therefore, the growth rate of the global economy is expected to gradually rise through fiscal 2011. Nevertheless, it is most likely that the pace of economic recovery will remain modest on the whole as the global economy is in a recovery process while adjustments are made to various excesses that had accumulated until around the mid-2000s, and the effects of balance-sheet adjustments in the United States and Europe, in particular, are likely to persist.
The Corporate Sector
In the manufacturing sector, exports and production have been increasing because of the progress in global inventory adjustments and stronger demand induced by various policy measures. However, the level of production is sti11low due mainly to the earlier plunge in production. While the pace of increase in production might temporarily slow as the effects of inventory adjustments and of demand-boosting policy measures at home and abroad wane, the rising trend of production is expected to continue as long as the moderate recovery trend of the global economy continues. In the absence of a substantial decline in firms' expectations of medium- to long-term growth of global demand, business fixed investment is also expected to recover gradually with the increase in production and recovery in corporate profits. In contrast, recovery in the nonmanufacturing sector and for small firms is likely to lag behind that in the manufacturing sector, since the pursuit of cost cutbacks in the manufacturing sector will put downward pressure on demand, and the household sector will face a severe situation, as will be discussed below.
The Household Sector
Private consumption, while likely to continue to show signs of recovery with regard to consumer durable goods due to the effects of various policy measures, will probably remain generally weak amid the severe employment and income situation. Recently, against the 3 backdrop of increased exports and production, there have been changes in some employment indicators, such as an increase in non-scheduled hours worked and a leveling out of the ratio of new job offers to applicants. However, the slack in the labor market is likely to continue for some time, and the severe situation for wages, particularly for bonus payments, will continue. Since improvements in the employment and income situation tend to lag behind any recovery in corporate profits, it is highly likely that a sustainable recovery in private consumption will be in sight in the latter half of the projection period. Keywords: JAPAN ECONOMY/BOJ FORECAST
COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
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