As the Japanese economy greets the new year, overcoming the long period of deflation that has suffocated consumer spending and corporate investment should be the main goal of the government and the private sector. Firms can expect tailwinds from a rise in demand due to stepped-up efforts in reconstruction from the March 11 triple disaster. But factors such as the strong yen, Europe’s sovereign debt crises and economic slowdowns in China and India could hamper Japan’s recovery.

In its outlook for 2012, the government expects gross domestic product to grow 2.2 percent in real terms and 2 percent in nominal terms, thanks to corporate and housing investment stimulated by the ¥12 trillion third supplementary budget for fiscal 2011. The Organization for Economic Cooperation and Development forecast puts Japan’s real GDP growth at 2 percent in 2012.

In issuing the outlook, the government assumed that Europe’s governments will alleviate their sovereign debt crises. But the OECD forecasts that the eurozone economy will grow only 0.2 percent in real terms in 2012, down from 1.6 percent in 2011.

Not only Greece but also such countries as Italy and Spain are suffering from serious financial crises. Uneasiness about the abilities of the countries concerned to redeem bonds is leading markets to demand higher interest rates for bonds, and higher interest payments in turn are causing the deterioration of the countries’ financial conditions.

The U.S. unemployment rate fell to 8.6 percent in November. But recovery in the housing market is weak. The OECD forecasts that China’s growth in real terms will drop from 10.3 percent in 2010 to 9.3 percent in 2011.

Stagnant exports to Europe and the government’s tight money policy to tame inflation may further lower China’s growth. India has revised its growth rate forecast for fiscal 2011 (April 2011 to March 2012) downward from around 9 percent to around 7.5 percent.

Japan’s plan to raise the consumption tax in April 2014 may adversely impact the economy. The government should have the courage to change the timing and the degree of the tax raise if necessary. People will not accept the tax raise unless the government slashes wasteful use of public money.

The government and the Bank of Japan should also propose measures to help prevent economic crises from worsening in the G-20 countries.

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