Projecting the Japanese Economy in 2012

After a tumultuous year in 2011, what can we expect for the Japanese economy this year?

If everything goes smoothly, RIETI Faculty Fellow Mitsuhiro Fukao sees the Japanese economy in 2012 achieving a reasonable growth rate of about 2% in large part due to a massive reconstruction budget proposed by the Noda administration. A significant portion of the reconstruction outlays, backed by increased public expenditure and financing, is expected to be spent in the first half of 2012, leading to relatively stable growth during this period, although a slowdown to some extent may occur in the second half. If this holds true, business sentiment in Japan should gradually improve.

However, Mitsuhiro Fukao also sees the possibility of a strong downward pressure exerted on the economy with the same impact as that of the Lehman Brothers collapse-triggered global financial crisis, with Europe as the epicenter. If this occurs, the Japanese economy can expect negative growth, along with increased unemployment and worsening deflation.

In the January issue of the RIETI Report, Mitsuhiro Fukao analyzes the cause of this risk scenario. Furthermore, he discusses in detail the international competitiveness of the eurozone countries, the lingering crisis in the PIIGS countries (Portugal, Italy, Ireland, Greece, and Spain), and the possibility of a serious recession in the eurozone.