Japan Cuts Growth Forecast as Law Change Causes Housing Slump

Dec. 19 -- Japan's government slashed its economic growth forecast by a third after stricter rules for obtaining building permits caused housing starts to plummet to a four-decade low.

The world's second-biggest economy will probably grow 1.3 percent in the year ending March 31 and 2 percent in the following 12 months, the Cabinet Office said in Tokyo today. It had previously expected a 2.1 percent expansion for this year.

Economists cut growth forecasts in the past two months as housing investment was the biggest drag on third-quarter gross domestic product. The Bank of Japan's Tankan survey last week showed large manufacturers expect business conditions to deteriorate to the lowest level in three years by next March.

The building slowdown will erase 0.6 percentage point from growth, the Cabinet Office said. That's the equivalent of about 3 trillion yen ($26 billion) of GDP, or the same size as Sri Lanka's economy, Bloomberg data show.

The plunge in housing starts was caused by a building- permit logjam after the government changed rules in response to a 2005 scandal in which an architect skimped on steel in dozens of hotels and condominiums.

The instruction manual describing the permit process was issued six weeks after the rules were introduced on June 20. Economic and Fiscal Policy Minister Hiroko Ota this week called the lapse a ``case of bad preparation.''

Pent-up demand will help housing investment rebound next fiscal year, adding 0.4 percentage point to growth, the Cabinet Office said. The government yesterday said housing construction ``has almost stopped decreasing.''

Japan may escape from deflation next fiscal year, today's report showed. The GDP deflator, a broad measure of price changes, will rise for the first time in 11 years in the period starting April 1, the government said.

The Cabinet Office predicted, incorrectly, in each of the past two years that the GDP deflator would rise.

============================================================
Table 1:                        FY2006    FY2007    FY2008
                              Actual  Forecast  Forecast
------------------------------------------------------------
Real GDP                          2.3%      1.3%      2.0%
Consumer Spending                1.7%      1.3%      1.3%
Housing Investment               0.2%    -12.7%      9.0%
Capital Investment               5.6%      0.9%      3.3%
Inventories*                     0.2%      0.0%      0.1%
Exports, Goods & Services        8.2%      7.1%      5.2%
Imports, Goods & Services        3.0%      1.5%      3.6%

Domestic Demand*                  1.5%      0.5%      1.7%
Private Demand*                  1.9%      0.4%      1.7%
Public Demand*                  -0.4%      0.0%      0.0%
Foreign Demand*                   0.8%      0.9%      0.4%
============================================================
Table 2:                        FY2006    FY2007    FY2008
                              Actual  Forecast  Forecast
------------------------------------------------------------
Nominal GDP                       1.6%      0.8%      2.1%
Consumer Spending                1.3%      1.0%      1.2%
Housing Investment               2.4%    -11.2%     10.4%
Capital Investment               6.2%      1.7%      3.9%
Inventories*                     0.2%      0.0%      0.1%
Exports, Goods & Services       12.0%      9.1%      6.5%
Imports, Goods & Services       12.2%      8.0%      5.2%

Domestic Demand*                  1.5%      0.5%      1.8%
Private Demand*                  2.0%      0.4%      1.8%
Public Demand*                  -0.5%      0.0%      0.0%
Foreign Demand*                   0.1%      0.3%      0.3%
============================================================
Table 3:                        FY2006    FY2007    FY2008
                              Actual  Forecast  Forecast
------------------------------------------------------------
Prices
Corporate Goods Price Index      2.1%      1.8%      0.6%
Consumer Price Index             0.2%      0.2%      0.3%
GDP Deflator                    -0.7%     -0.5%      0.1%

Unemployment (Rate in %)          4.1%      3.9%      3.8%

Industrial Production             4.8%      2.4%      2.2%

Balance of Payments (in trillions of yen)
Trade & Services Income            8.2       9.7      11.2
Trade Income                     10.5      12.1      13.2
Exports                          73.7      80.2      85.4
Imports                          63.2      68.1      72.1
Current Account                   21.2      25.1      26.1
percent of Nominal GDP           4.1%      4.9%      4.9%
============================================================