Japan: Treading Water

Japan was the frst of the G7 countries to emerge from the recession. Japan’s recovery, however, appears to be the most fragile among these economies, with numerous challenges to its sustainability. The light at the end of the tunnel is still not all that bright. It is likely to take at least a couple more quarters for Japan to show sustainable recovery.

Caught in a vicious cycle. With exports still down from last year, domestic demand has to lead the recovery. Consumers, however, are reluctant to up the ante, and for obvious reasons.
Structural issues. Compounding the cyclical factors are certain structural features that can drag growth down.
Faint prospects in the near term. Japan unveiled another stimulus package of 7.2 trillion yen on December 8, 2009, to pull the stagnating economy out of the mire. The package seeks to augment employment and help small and medium businesses. The package, however, may not be able to pull off any miracles. Japan is probably in need of a bigger intervention, especially greater quantitative easing to haul the economy out of defation.

The cyclical factors, in combination with the structural issues, may pull growth down in the near term. Exports to emerging Asian economies can help sustain slow recovery. The prospects of a double dip, however, look more probable than a solid recovery.

Download Deloitte’s Japan: Treating Water

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