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Japan headed for a ‘mild recession’ in 2008: Morgan Stanley

December 13, 2007
By Ken Worsley


In a piece published yesterday at the Morgan Stanley Global Economic Forum, Takehiro Sato, the firm’s chief Japan economist, announced that he forecasts “only a mild recession, with real growth of around 1% in 2008.” One month ago, Sato’s growth estimate for Japan’s economy in 2008 stood at 1.9 percent - yesterday that was cut to 0.9 percent.

At the same time, Sato acknowledges that the risk of zero growth in 2008 also exists. This scenario might result from the deadly trio of a stronger yen over a prolonged period of time, a recession or serious slowdown in the US economy, and sustained higher oil prices.

Sato’s piece blames not only high oil prices, the fallout from the subprime crisis and a strong yen for the negatively revised assessment, but also Japanese governmental policies. Stricter consumer finance laws and the bungled implementation of revisions to the Building Standards Law are both cited. Sato also asserts that the government has done a poor job discussing any possible tax increases with the public, and that this has contributed to sluggish consumer spending.

We seem to remember back in October that the Ministry of Finance hired a certain Mr Masuda away from Dentsu to serve as the Ministry’s Director of Public Relations Planning and Coordination - in other words, he was the man charged with laying out the plan to explain potential tax hikes to the public. Thus far, there has been noticeably little planning and perhaps even less coordination amongst governmental bodies on this issue. Even today, more news of government panels urging an increase in the consumption tax hit the news.

His full report (which is broken down into two sections) is a must read for anyone following the Japanese economy at this time. The part that spooked us discusses why wages are unlikely to increase in the first quarter of 2008, and concludes by saying:

…[C]onsumer sentiment is likely to worsen, which would be negative for consumer spending and could be one reason for an even more stagnant tone to the economy in Jan-Mar. Additionally, the reversal of structural reform may slow down productivity growth and worsen cost-push inflation in the longer term.

And one last excerpt, concerning interest rates:

Monetary policy will likely be gridlocked. Chances of a near-term hike are already remote, and looking ahead to the middle of next year, monetary policy could be turned into a political football with the Diet in a stalemate when the terms of the governor and deputy governors expire on March 19. The possibility of a vacuum in the BoJ’s leadership, which we originally highlighted whimsically, now looks alarmingly real.

We were also whimsical about such a situation, but not since late on the evening of July 29, when it became obvious that the Democratic Party of Japan would gain control of the upper house of parliament and be able to block the appointment of the successor to Mr Fukui. Bad news for Mr Muto.

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Comments

12 Responses to “Japan headed for a ‘mild recession’ in 2008: Morgan Stanley”

  1. Herv on December 14th, 2007 12:34 pm

    It depend on how you define ‘mild recession.’ This point of view holds that growth lower than 1% over a prolonged period is a ‘mild recession.’ Not all firms/analysts will agree with that. We don’t see just how long needs to be under 1% for it to be defined a ‘mild recession.’ There will still be industries that grow in 2008.

  2. Aaron on December 15th, 2007 1:00 pm

    I think Japan’s economy is more health than most developed countries, US’s economy will be worse than now if US government doesn’t transfer the pressure to other countries, Japan can reduce the economic gap between them more easily.

    Analysts estimate that Germany is still in the largest exporter’s position this year, that’s big threats. To Japan, China is not economic threat, because China just export low technologic products, the competitive advantage is base on the LOW PRICE. Three enginees drive the economy, there exportation, investment and consumption, I think Japan can gets more benefits from exportation, of course the high technologic products.

  3. Wondering on December 17th, 2007 3:32 pm

    Dude, Japan and the U.S are connected in so many ways. If the U.S. goes into recession it is more than likely that Japan will too.

  4. Ken Worsley on December 17th, 2007 4:08 pm

    Wondering, I think the hope is that demand from developing markets will stay strong enough to make up for any slowdown in the US economy and US spending on imports, as well as the recent strength of the yen, which may last a bit longer than originally expected. I don’t think the US is headed towards a recession, though that is not impossible. Japan certainly does not have all its eggs in one basket in terms of exports to the US, but it is obviously still an important, large chunk of the nation’s export market.

  5. Wondering on December 17th, 2007 9:12 pm

    I still think Japan would follow the U.S into recession this time. It isn’t clear here how much the Japanese banks are involved with the sub-prime mess. Given their history of unwillingness to clean up bank messes, it may cause some problems. In addition, the U.S is Japan’s largest export market. Yes, Japan isn’t dependent on the U.S. but psychologically I think they are. That is the business world thinks so and will print articles stating so. Consumer demand won’t get better and that is why the prices in Japan are at extortion levels. It is the only way to get money from the frugal Japanese. The imbalance in trade would go down for the Japanese and that may cause the gov. to freak a bit. Feeding into the entire process would be the Japaneses companies spending less on R&D. That could also help spur a recession because the companies might hire less people, give smaller or no raises. The domino effect of that, even less speding from the frugal households (mine included). ..

  6. Ken Worsley on December 17th, 2007 10:04 pm

    Wondering,

    Actually, in this report (http://www5.cao.go.jp/keizai3/2007/1214nk/keizai2007-2008pdf.html) the Cabinet Office says that a slowdown in the US economy is the biggest risk, because they doubt it would remain isolated and would probably spread to China and the EU. The report estimates that a change down in US GDP by 1% would pull Japan down 0.9% over the year.

    The Bank of Japan, on the other hand, holds that the economies of Europe, China and the US are separate enough that a US slowdown would not have such a drastic effect on Japan.

  7. wondering on December 18th, 2007 9:14 am

    BOJ doesn’t know shit. Hell they should be the ones to jump on that article and those numbers since they don’t want to lift interest rates. That is another excuse for them to keep them so artificially low. Of course they have to put their “spin” on things to lie to the world, keep their own people happy and keep the foreign investments coming in. The economies are so intertwined that Japan would follow. Look at the damn stock market, it follows the U.S market DAILY!! U.S market went down last night, short the Nikkei today you will make money! The Japanese market doesn’t even have a mind of its own.

  8. Carob on December 18th, 2007 4:55 pm

    Foreign investment isn’t coming in. Japan is dead last in the OECD for FDI, and protectionist policies remain. What does exist is window dressing.

    As far as I’m aware, Fukui wants to raise rates. He just can’t now.

  9. J on December 21st, 2007 2:34 pm

    Actually a recession will most likely hit either way. If prices are rising, inflation is occuring, at the same time salaries are not rising. In addition to that the BOJ won’t raise interest rates. This is all the recipe for bad shit to happen. If they do raise rates the companies will be even more strained. HEY LET’s EXPORT OUR WAY OUT LIKE WE ALWAYS DO!!!! TO DO THAT-HOW BOUT” PUSHING THE YEN TO 120!

  10. Ponzi on December 21st, 2007 3:57 pm

    “the BOJ won’t raise interest rates.”

    From today’s Nikkei:

    “Although the Bank of Japan left its monetary policy unchanged Thursday, the possibility that it may cut interest rates is becoming increasingly real in light of growing uncertainties over the economic outlook.”

    http://www.nni.nikkei.co.jp/AC/TNKS/Nni20071221D21HH678.htm

  11. WG on December 21st, 2007 9:21 pm

    Last time the recovery was squelched by raising rates too soon, this time will go down as having been squelched by not having raised them enough. In the end, neither is the cause at all. Could someone explain what was actually “Quantitatively eased?”

  12. J on December 23rd, 2007 1:12 pm

    Last time there was no inflation, that is the key here. Prices are rising. Nothing like last time.

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