Govt: Econ Likely To Pick Up Further, But Risks Remain

TOKYO (Dow Jones)--The Japanese economy will likely continue its recovery from the recent severe recession, but policies must be carefully implemented at the right time as significant downside risks remain, the Cabinet Office said Friday.

In a white paper on the economy for the current fiscal year, the government said that the worst of the recession is over due to a pick-up in overseas demand and a series of economic stimulus measures taken since last year.

As a result, the government forecasts that Japan's gross domestic product may rise for the first time in three years, by 0.5% in the current fiscal year after contracting by 3.3% in fiscal 2009.

Recent data show exports and industrial production, which are important growth engines for the Japanese economy, are picking up thanks to recovering overseas demand, the white paper said. Indeed, Japan's merchandise trade surplus widened for the first time in 20 months in June, expanding to Y508.0 billion from Y104.1 billion a year earlier. Industrial production, meanwhile, rose by 5.7% in May.

Massive stimulus measures are also supporting the economy, the white paper said, with the measures seen as boosting the nation's negative GDP figure for fiscal 2009 by 2.9 percentage points, and by 0.9 percentage points in fiscal 2010.

Since last August, the government has implemented four stimulus packages, including fresh spending worth Y26.2 trillion.

Still, the Cabinet Office is not completely optimistic on the outlook for the economy. The paper called for the need to pay attention to three major risks: worsening employment conditions, falling consumer prices and the possibility of further economic declines in overseas economies.

The cautious stance may suggest that the government is poised to implement additional economic measures if needed.

Of the three concerns, the most serious is the rising unemployment rate, which stood at 5.2% in May. As the nation's GDP is now at about 70% of pre-financial crisis levels, some analysts say the unemployment rate may rise above 6% by the year end - far above the record 5.5% registered in 2002 and 2003.

Another threat is declining growth in overseas economies, as although the worst of the global financial crisis is over, it's too early to say that things have calmed down completely, the Cabinet Office said.

If growth in overseas economies plunges again, the Japanese economy may follow suit as exports and industrial output are likely to drop heavily.

The Cabinet Office also fears that the Japanese economy may again enter a period of deflation - defined as a period of persistent price falls. Japan's core consumer price index has fallen for three consecutive months. Most recently, it fell by 1.1% from a year earlier in May, and some say it may decline more than 2% in August and September.

The government said the drop in prices is mostly due to volatile oil and energy prices, and is therefore temporary, but added that careful monitoring is necessary because domestic demand for goods and labor is decreasing.

Careful Policy Management Necessary Amid Sensitive Times

With such risks being so apparent and persistent, the paper called on the government and the Bank of Japan to remain alert and take necessary steps.

In the longer term, however, Japan needs to focus on regaining its fiscal health, the paper said. The nation's debt is expected to reach 163% of its GDP - the highest among industrialized nations - by the end of March.

And to make future economic growth sustainable, the government must keep investing in research and human resources to improve productivity. Also, it should reinforce the safety net for the unemployed so that worker sentiment won't rapidly deteriorate even during difficult economic times, the paper said.