By Shigeo Kodama

TOKYO (MNI) – Japan’s government is likely to stick to its official
GDP forecast for this fiscal year for a real 2.2% growth and will
probably project an expansion close to 2% for fiscal 2013, former senior
government researchers said.

The government is expected to review its economic projection for
this fiscal year and announce its forecast for fiscal 2013 later this
month or next month.

Takao Komine, a professor of economics at Hosei Graduate School of
Regional Policy Design, said that “major change is unlikely” in the
government’s projection for fiscal 2012 as the current economic
conditions are more or less in line with its scenario released in
January.

The government then said reconstruction demand will lead domestic
demand in fiscal 2012 under the assumption that the global financial
market turmoil triggered by the European debt crisis would ease.

For Prime Minister Yoshihiko Noda, achieving a 2% economic growth
goal is essential.

Last month Noda’s government reached an agreement with the two main
opposition parties — the LDP and Komeito — to hike the current 5%
consumption tax rate to 8% in April 2014 and to 10% in October 2015 on
condition that the economy is growing at a real 2% at the time.

The lower house of parliament has approved tax and social security
reform bills, paving the way for a sales tax hike aimed at funding
public pension and medical services. The bills still need to receive
approval from the upper house before becoming law.

According to the latest survey of 40 economists conducted between
May 25 and June 1 by the Japan Center for Economic Research, their
average growth estimate for fiscal 2012 ending March 2013 was +2.27%.

Koichi Haji, chief economist at the NLI Research Institute, said
the Japanese economy has been improving but warned about lingering
uncertainties arising from the European crisis, the Chinese economic
slowdown and the strong yen.

As for the fiscal 2013 outlook, Haji, a former senior official at
the then Economic Planning Agency (now the Cabinet Office), said the
government is expected to draw up a 2% growth projection.

Economists’ forecasts for the fiscal 2013 GDP averaged +1.5%,
slower than in the current fiscal year as demand for rebuilding the
earthquake-hit northeastern region is likely to wane.

But at the same time, the planned sales tax hike from the current
5% to 8% in April 2014 will prompt consumers to buy big-ticket items
such as houses and cars toward the end of fiscal 2013, Haji said.

Such rush purchases would boost fiscal 2013 GDP by 0.5 to 0.6
percentage point, he said.

Meanwhile, some market participants are concerned that the planned
consumption tax hike may push the Japanese economy into a recession in
fiscal 2014 or later, as seen in 1997, when the tax rate was raised to
5% from 3%.

The Japanese economy slipped into a downward cycle in June 1997,
following the sales tax hike two months earlier. On a yearly basis, GDP
was flat with a slight negative bias (-0.0%) in fiscal 1997 and
contracted 1.5% in fiscal 1998 before rising 0.5% in the following year.

But Komine, a former director of the Research Bureau of the then
EPA, said, “The sales tax hike alone is unlikely to cause a major
recession.”

He said the 1997 downturn was triggered mainly by the Asian
currency crisis and Japan’s bad loan problems.

He said the sales tax increase lowered Japan’s fiscal 1997 GDP by
only 0.3 percentage point, adding that the tax hike by 3 percentage
points in April 2014 would push down GDP by only 0.45 percentage point
in fiscal 2014.

According to the Cabinet Office’s economic model, the sales tax
increase by 1 percentage point will lower Japan’s GDP by 0.15% point.

skodama@marketnews.com
** MNI Tokyo Newsroom: 81-3-5403-4838 **

[TOPICS: M$J$$$,M$A$$$,MGJ$$$,MAJDS$]