As Rebuilding Tapers Off, So Does Japan’s Economy

Japan’s recovery from the devastating tsunami and earthquakes of March 2011 have boosted the country’s gross domestic product to real growth of 2% in 2012. But the building boom is about to end and the prospects for the future are getting dimmer.

A sales tax increase from the current rate of 5% to 8% is scheduled to take effect in 2014, an event that Standard & Poor’s expects to boost consumer spending next year. But that spending will be offset by declining rebuilding investments. By the time the tax hike takes effect, consumer spending will fall again.

S&P, which rates Japan’s debt at AA- with a Negative outlook, has published a new report on Japan, which offers this overview of the country’s medium-term prospects:

Overall, we see no significant improvement in the medium term growth prospects for Japan, unless the global economy recovers and the government effectively addresses deflation by boosting domestic demand to reduce the negative GDP gap. Moreover, over the longer term, the country’s shrinking and aging population will undermine the country’s growth prospects unless the natural birth rate rises or the country boosts immigration.

S&P sees lower demand for Japanese exports, given the overall softness in the global economy and rising expenses for oil and natural gas to produce electricity, now that the country has virtually eliminated nuclear power generation.

Paul Ausick