(RTTNews) - The Japanese economy is likely to hit a soft patch in the the first half of fiscal 2010, although it is unlikely that the economy retreats into a recession, BNP Paribas Chief Economist Ryutaro Kono said in a note on Wednesday.

Last week the Bank of Japan raised its economic outlook. The central bank now expects the economy to shrink 3.2% in fiscal 2009 compared to a 3.4% fall estimated in July. In fiscal 2010, real GDP growth is seen at 1.2%, up from July’s forecast of 1%.

“We did not expect the BoJ to explicitly predict an autonomous recovery that would bring accelerating growth in FY2011,” the economist said. “Despite the upturn in exports, we felt that it would be difficult for the central bank to definitely predict recoveries in household income and non-manufacturing earnings, given the risk that growth rates expected by corporations and households have declined.”

The BoJ assessed that as balance-sheet adjustments in the United States and Europe make fair progress, improvements in the corporate sector originating from exports are likely to spill over to the household sector. Therefore, in fiscal 2011 the growth rate of Japan’s economy is likely to reach a level clearly above the potential growth rate. The BNP Paribas economist said they cannot completely exclude this possibility because growth will accelerate past its potential rate if an autonomous recovery begins after a downturn has produced a major gap between supply and demand.

However, the economist said, companies still need to cut costs to cope with the low profitability. “It seems premature to predict a definite recovery when employee compensation is still trying to find a floor,” he said.

The economist was in full agreement with the BoJ’s decision to revise down Japan’s potential growth rate from “around 1%” in April to “around 0.5%” in October. Prior to April, the central bank put Japan’s potential growth rate between 1.5% and 1.9%. The economist warned that the drop in the potential growth rate manifests itself at the micro level through restrained household and corporate expenditure that accompanies a decline in Japanese firms’ medium- to long-term growth expectations and a decline in households’ permanent income. “The Japanese economy is probably already beginning to see these developments unfold,” he added.

The BoJ predicted the core consumer price index or CPI would fall 1.5% in FY2009, 0.8% in FY2010, and 0.4% in FY2011, marking three straight years of deflation. The economist expects Japan’s price declines to near or hit zero at the end of fiscal 2011. “Under this main scenario, it will suffice to continue the current zero interest rate policy, even though prices will fall for three years,” he said adding that no further easing measures are required.

Last week the central bank voiced its concern over the proposed “loan moratorium” and the accompanying extension of the credit guarantee system. The BoJ said, “If the public measures are maintained for longer than necessary, the productivity of the economy as a whole might decline through the retention of resources in inefficient areas.” The economist said he is in complete agreement with the BOJ’s worry and it is an alarm bell for Japan’s DPJ government, led by Prime Minister Yukio Hatoyama.

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Posted in Categories: Economy, Eurozone, Japan, Releases, USA.

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