Recovery awaits Japan in 1H13

The newly elected government is calling for bolder quantitative easing moves.

DBS Group Research noted:

The economy remained in recession in 4Q12. Industrial production continued to decline in November and manufacturing PMI stayed well below 50. Real GDP growth in 4Q12 is estimated to be -1% QoQ saar, versus -3.5% in the previous quarter.

That said, we think the economy is already close to the bottom of the current downcycle, and a recovery will lie ahead in 1H13. When looking at the demand-side indicators including exports and retail sales, the trend of deterioration has stabilized in November.

On the supply side, the METI forecasts point to a strong growth in industrial production in December and January, although the actual IP growth could still underperform the forecast numbers based on last year’s experiences.

The Bank of Japan eased policy once again on December 20th, the 5th time in 2012. The size (JPY 10trn) and the composition of asset purchases (JGBs, T-bills) were both within expectations. In order to have significant impact on the financial market indicators and on public inflation expectations, innovative QE measures would be required.

The newly elected LDP-led government is calling for bolder QE moves, such as raising the inflation target to 2% from 1%. The earliest possible timing for the BOJ to consider more aggressive measures is January 22nd when it reviews economic forecasts. A more probable timing is 2Q13 after the conservative Governor Shirakawa retires.

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