Boston, MA -- (SBWIRE) -- 03/19/2013 -- Core Views

The Liberal Democratic Party's (LDP) return to power has lifted optimism of many, as seen in the impressive climb of the country's equity indices. We do expect the aggressive policy action undertaken by both the government and the central bank to lift economic activity as businesses and households move their spending forward to take advantage of subsidies. That said, we do not believe that this uptick will last for the full year of 2013, and expect the economy to lose steam as the fiscal measures subside. As such, despite positive sentiment surrounding Japan's economy, we remain cautious and maintain a tepid growth forecast of 0.9% for 2013.

As a result of the aggressive fiscal stimulus packages (both supplementary budget and budget for fiscal year 2013/14) that Prime Minister Shinzo Abe's administration plans to implement, we expect the growth of outstanding government debt to accelerate, as compared to the past three years of decline under the Democratic Party of Japan (DPJ). Despite this, we maintain our view that the government's stimulus only pushes the country closer to a fiscal crisis, and we expect any uptick in economic activity to be temporary, subsiding when the measures end.

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The massive changes in Japan's current account dynamics continue to push the country's current account balance towards zero and into the red beyond 2017. We maintain our expectations for import growth to slow as the power situation in Japan stabilises. Moreover, we believe that exports will see a moderate recovery in 2013, and the trade deficit to narrow as a result of these positive dynamics. However, a possible escalation of territorial disputes with neighbouring China could once again plunge exports into the red and hamper the recovery of the trade account.

Long-term household savings rates will continue to decline as a progressively ageing society and a shift towards lower-paying contract (non-regular) employment forces more Japanese households to consume a greater proportion of their income.

While post-earthquake reconstruction should result in higher loan demand in the short term, we believe the longer-term impact will be muted as the Japanese economic expansion remains anaemic. Moreover, we believe earthquake assistance should result in further increases in lenders' bond holdings, leading to greater industry exposure to mounting public debt risks.

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