A month after the devastating March 11 earthquake and tsunami struck Japan, uncertainty over the country’s economy has only escalated, with manufacturers crippled and the crisis at the Fukushima No. 1 nuclear power plant weighing heavily on business and consumer sentiment.
The government of Prime Minister Naoto Kan is struggling to secure funds for emergency spending on reconstruction at a time of fiscal difficulty, while the Bank of Japan has decided on an emergency loan program, only to be met with calls from lawmakers to do more.
The fallout from the disrupted supply chains for industrial products, which has impact major producers of cars and gadgets, is not limited to the domestic market but is spreading throughout the global economy.
Experts are paying close attention to the consequences of the crisis at the Fukushima plant, which led Tokyo Electric Power Co., the plant’s operator, to start rolling blackouts in Tokyo and surrounding areas to conserve energy. This sparked fears that electricity shortages could generate further downward pressure on the economy later this year.
“The situation at the Fukushima nuclear plant site has not improved, and indeed may have deteriorated further,” economists at JPMorgan Securities Japan Co. wrote in a recent report. “Economic activity . . . will pick up from May, but the lingering effects of the plant accidents will likely continue to weigh on the recovery of consumption.”
The nuclear crisis has also triggered strong concerns about food contamination as a result of radiation leaks, which could seriously affect domestic consumption as well as exports. A number of countries have already moved to limit their imports of products from Japan.
Recently, the yen has been weakening against the U.S. dollar and the euro on prospects that U.S. and European central banks will soon end their ultraloose monetary policies, fueling optimism that Japanese exporters will revive. But analysts say the nuclear concerns have cast a shadow over this prospect.
On Friday, Kan said the government will spend a “very large” amount of money to rebuild the quake-hit Tohoku region, when he met with a prefectural governor from the region. Kan stressed that the second extra budget for fiscal 2011 would be large, according to Miyagi Gov. Yoshihiro Murai.
The comment came, however, at a time when the government has yet to decide on the first extra budget for the year through next March. That budget is to finance the early phase of reconstruction work and could amount to more than ¥4 trillion. Some lawmakers say the country needs two or three supplementary budgets, which could possibly total over ¥10 trillion, for fiscal 2011.
With Kan ruling out any issue of new debt for the first budget, the government and his Democratic Party of Japan are seeking funds through such steps as shelving or reducing their benchmark policy spending, a move also designed to win support from opposition parties, which control the Upper House.
Market concerns are that if the government issues more bonds, then Japan’s efforts to restore its fiscal health — the worst among major developed countries — would hit a snag. The government is even considering cutting its annual contributions to the nation’s pension funds to shift some money to funds for the budgets.
The BOJ has separately been taking emergency steps, flooding the country’s banking system with liquidity and preventing commercial lenders, especially those in Tohoku, from running out of cash to serve their customers.
On Thursday, the central bank announced it would additionally introduce a program that would offer ¥1 trillion in one-year loans at an interest rate of 0.1 percent, possibly by May, to encourage local lenders to channel money to troubled companies in quake-hit areas.
Finance Minister Yoshihiko Noda immediately welcomed the BOJ’s move. But the positive reaction by the finance chief does not represent an endorsement from the political arena of BOJ Gov. Masaaki Shirakawa, who has rejected repeated calls by some lawmakers for the bank to print more money and finance the supplementary budgets.
While the nation’s Public Finance Law basically bans the BOJ from underwriting sovereign debt, Shirakawa has underlined some of negative effects that monetizing the debt — or having the BOJ directly purchase long-term bonds from the Finance Ministry — would pose, saying such a policy could trigger “raging inflation” and cause “serious damage to people’s lives and economic activities.”
Takahide Kiuchi, chief economist at Nomura Securities Co., said in a recent report that the BOJ will continue to employ unconventional methods to sufficiently ease monetary conditions while keeping its key short-term interest rate steady at around zero percent.
The BOJ could support companies’ fundraising further by “raising the amount of its asset purchase funds by ¥3 trillion to ¥5 trillion from the current level of around ¥10 trillion” when its Policy Board next meets April 28, Kiuchi said.
Despite the authorities’ all-out efforts, an economic slowdown is widely seen as a near-certainty.
The government last month released its first preliminary estimate that said the impact of the quake could cost the economy up to ¥25 trillion and push the country’s real gross domestic product down by 0.5 percentage point.
But the figures only factored in the destruction of infrastructure, housing and corporate facilities in Tohoku, with the Cabinet Office admitting it was unable to specify some other factors, even though they could be even more serious threats to the economy, such as the nuclear crisis and power supply shortages.