International | Aug 16 2006
By Chris Shaw
Following the release of lower than expected growth figures for the first quarter of its 2007 financial year Morgan Stanley has cut its full year estimate for Japan’s economic growth, but has not changed its positive view towards the economy overall.
It now expects the economy to record growth for the current financial year of 2.8%, down from 3.2% previously, while in 2008 its estimate is unchanged at 2.3%. It likes the fact prices are stabilising thanks to strong domestic demand and better productivity, while the real highlight in the broker’s view, and which provides support for its positive outlook, is that the corporate sector is driving the economic recovery.
Evidence of this comes from the fact the broker has revised up its forecast for real capex growth to 10% from 7% previously, the change reflecting six months of annualised growth of more than 10% for the full year. The broker notes surveys regarding capital spending intentions indicate the IT and materials sectors are set to take over from the automobile sector as the primary drivers of this increase, which is being helped by higher energy prices and ongoing labour shortages and the resultant desire to increase efficiencies.
The broker notes this stronger spending by corporations comes at an opportune time, as personal consumption levels appear to be stabilising at a growth rate of around 2%, while the housing market outlook also appears moderate.
At the same time net exports for the current year have been revised down, the broker noting the slowing in a number of economies globally is likely to see this figure fall short of previous estimates. The downturn is unlikely to be severe though, as the broker is forecasting US growth to pick up slightly in the September quarter, setting the stage for a recovery in Japan’s export performance.
Inflation is not expected to be a problem thanks to a combination of improved productivity and modest wage increases, while the broker also discounts the potential for deflation to re-emerge given the combination of strong private sector demand and stable prices. This combination should also be good for corporate profits, though the broker notes it has trimmed its estimate to an increase of 13% year-on-year, down from 17% previously.
Factoring all this in, the broker suggests the Bank of Japan (BoJ) is likely to adopt a modest pace in terms of future interest rate increases, with its most likely scenario an increase in official rates every six months or so until the official rate reaches 1% in 2008, meaning monetary policy will remain quite loose. For equities the broker sees a brighter outlook, suggesting companies will lift their earnings outlooks over the course of the year, so with the stockmarket regaining some of the confidence lost in the recent shakeout the potential is for the index to move higher. The broker is forecasting a level of 1,700 on the Topix by early autumn, compared to a current level of 1,625.
