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After strong growth in the first half of 2012, supported by reconstruction spending in response to the 2011 Great East Japan Earthquake, the recovery stalled, reflecting the slowdown in world trade and weaker domestic demand. While the economy is projected to pick up in 2013, annual growth may be limited to around ¾ per cent in both 2013 and 2014, as reconstruction outlays wane and planned tax hikes damp private consumption. The unemployment rate will remain above its pre-2008 crisis level.
The increase in the consumption tax rate from 5% to 10% by 2015, combined with spending restraint, should enable Japan to achieve its objective of halving its primary budget deficit to 3.2% in FY 2015, with much of the consolidation occurring in 2014. With gross public debt projected to reach 230% of GDP in 2014, additional measures to attain a primary budget surplus by FY 2020 as intended are a priority. A detailed and credible fiscal consolidation plan, including specific revenue increases and spending cuts, is essential to sustain confidence in Japan’s public finances. The Bank of Japan has steadily expanded its asset purchase programme to 19% of GDP by October 2012. It should maintain its virtually zero interest rate policy and continue increasing quantitative measures until inflation is firmly positive at its target rate of 1%.