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TEXT-S&P Report: Japan Growth To Slow As Reconstruction Boost Fades

(The following was released by the rating agency)

SINGAPORE (Standard & Poor's) Oct. 2, 2012--The rebuilding efforts in response to the 2011 earthquake and tsunami have been giving Japan's economy a boost, but the reconstruction-fueled recovery is set to run out of steam, Standard & Poor's Ratings Services said in a report published today.

Despite the uncertain global economic outlook, Standard & Poor's Ratings Services expects Japan (AA-/Negative/A-1+) to post around 2% real GDP growth in fiscal 2012 (ending March 31, 2013). But medium-term prospects are less rosy, with growth falling to 1.6% in fiscal 2013 and below 1% on average in fiscal 2014, in our base-case view.

We see public spending on reconstructing Japan's northeast-the site of the March 2011 earthquake, tsunami, and nuclear disaster--as the main drivers for growth in fiscal 2012, as well as lift from low base effect. Private-sector investment for reconstruction will also provide support. On the other hand, we expect private consumption to remain weak. Net external demand will also likely undermine growth because of the weak global economy and Japan's move to reduce its reliance on nuclear energy, which has significantly increased total imports of oil and natural gas.

In our view, a sales tax hike--to 8% from April 1, 2014, and to 10% from Oct. 1, 2015, from the current 5%--will trigger an initial spike in consumer spending and support fiscal 2013 growth to a degree, but falling contributions from reconstruction will counter this. We then expect slower growth in fiscal 2014 and 2015 as the higher sales tax takes hold and dampens consumer spending.

Overall, we see no significant improvement in the medium term growth prospects for Japan, unless the global economy recovers and the government effectively addresses deflation by boosting domestic demand to reduce the negative GDP gap. Moreover, over the longer term, the country's shrinking and aging population will undermine the country's growth prospects unless the natural birth rate rises or the country boosts immigration.

Keywords: MARKETS RATINGS JAPANGROWTHREPORT