Japan's GDP likely to show a spike


A lift in exports is expected to boost Japan's GDP figure for the March quarter

By CNN's Geoff Hiscock
and wire reports

TOKYO, Japan -- Japanese government figures due out on Friday will likely show Japan's economy grew sharply in the March quarter after three straight quarters of contraction.

But analysts are questioning whether it will be more than a one-off spike.

The median forecast is a for a 1.7 percent jump in gross domestic product for the world's second largest economy, equalling an annualized rate of 6.8 percent.

The wide range of forecasts, from 0.7 percent to 2.5 percent, shows how difficult it is to determine the strength and sustainability of any recovery in Japan, according to IFR Asia Pacific chief economist George Worthington.

In his weekly outlook released Monday, Worthington says IFR's forecast is for 1.1 percent growth, or an annualized rate of 4.8 percent.

That is more optimistic than the 0.8 percent growth prediction of HSBC Australia chief economist John Edwards, but well below the bullish 2.2 to 2.5 percent figures that appeared in Japanese think tank forecasts late last month.

Worthington expects any gain in the March quarter will be eaten away in subsequent quarters.

'No progress' on reforms


Increasing exports to the U.S. of cars such as Honda's NSX are helping the Japanese economy

"We believe that this Q1 bounce is in no way sustainable," he wrote, noting there has been "virtually no progress on domestic economic reforms".

He said Japan's bad debt problem remained an obstacle to the central Bank of Japan's easy monetary policy having any impact.

Nikko Salomon Smith Barney's Jeffrey Young told CNN last Friday that the Japanese government's structural reforms were neither deep enough nor rapid enough to bring down the country's debt levels.

That view is shared by ratings agency Moody's Investors Service, which cut Japan's long-term credit rating by two notches Friday because of the country's debt.(Full Story)

Moody's said Japan's public debt -- which will likely exceed 140 percent of GDP by next March -- was at unprecedented postwar levels in the developed world.

Hong Kong-based analyst Michael Preiss of CFC Securities told CNN Monday the Moody's downgrade could be a "blessing in disguise" for Japan if it finally prompted Japanese politicians to get serious about reforms.

System 'essentially closed'

In releasing its downgrade, Moody's said the risk of a financial crisis was remote because of the "essentially closed nature of the Japanese financial system."

Finance Minister Masajuro Shiokawa dismissed the Moody's decision. "Just because they do such things we won't change our policies," Reuters news agency reported him as saying.

Japan has largely been immune to downgrades because its debt is entirely denominated in yen and is mostly owed to domestic investors. It also holds the world's largest foreign exchange reserves of about $407 billion.

IFR's Worthington said Monday it was true that there was no chance of Japan defaulting on its yen obligations.

"It (the government) could simply print the yen to pay off its debt, thus inflating its way out of an otherwise impossible situation," he wrote.

"That, in our view, is the most likely eventual route, and for holders of yen bonds -- mostly local savers and institutions -- that might prove no less troubling than an outright default."

He said it was this risk that the Moody's downgrade reflected.

Currency intervention

The Japanese currency has been closely watched in recent days, with the Bank of Japan intervening last week to weaken it against the U.S. dollar. On Monday the yen was stable, trading at 124.25 to 124.30.

Stocks rallied Monday, with the Nikkei 225 putting on almost 1.2 percent to finish at 11,901.39. The broader Topix was up about 1.1 percent to 1132.22.

The general view in Japan is that the economy is bottoming out, thanks to a rise in exports of cars and consumer electronics to the recovering U.S. economy.

But despite this export-led uptick, Japan still faces a host of problems that include deflation, high unemployment, declining consumer demand, a banking system burdened with bad loans, and a powerful group of politicians opposed to the structural reforms put forward by Japanese Prime Minister Junichiro Koizumi(Full Story).