Negative external factors haven't gone away

Recovery from quake could block reforms

by Shinya Ajima

Kyodo

One year after the devastating March 11 quake and tsunami, the economy has been recovering from the tremendous shocks caused by the disasters, which disrupted the nation’s production and exports while hurting business and consumer sentiment.

But with conditions apparently getting back to normal following the domestic crisis, familiar circumstances have re-emerged in which the world’s third-biggest economy has been bombarded with a number of external shocks, including the sovereign debt crisis in Europe and the relative strength of the yen against other major currencies, as well as the massive floods in Thailand.

Experts warn that the superficial recovery from the natural disasters could make it harder for authorities to remain watchful of the fundamental problems they have to solve to ensure the economy is on a recovery track, such as weak domestic demand, a rigid employment system and the lack of business innovation.

“The Japanese economy suffered significant fluctuations due to the earthquake but will again become subject to external factors starting in the second half of 2012, when the impact of the disasters would be diminished,” Nomura Securities Co. economists said in their report released ahead of the anniversary of the March 11 calamity.

“Our main scenario is that the economy will recover more stably in 2013″ with the support of improvement of the export environment, they said, while adding “there is a risk that the Japanese economy may run out of steam in the second half of 2012 if external conditions deteriorate further than our estimate.”

Amid fiscal problems in Greece and some other eurozone countries, Japanese exports have significantly slowed, as the sovereign debt crisis in Europe has cast a shadow over the global economic outlook. Although a set of policy responses by European leaders has eased tensions in financial markets somewhat, some issues remain unsolved as they discuss how to enhance their rescue funds.

Japan marked its first annual trade deficit in 31 years for 2011, with exports slowing on the stronger yen, the Thai floods, which affected many Japanese manufacturers with production bases in the Southeast Asian country, as well as on the gloomier prospects for the world economy due to the eurozone crisis.

The earthquake and tsunami also affected the trade result by slowing exports while disrupting nationwide supply chains for industrial output. However, the fallout from the supply-side constraints was almost addressed by summer, analysts said.

The economy turned upward in the three months through September on recovering exports, private consumption and housing investment after decelerations during the first and second quarters of 2011.

In the final quarter, though, the nation’s real gross domestic product again marked a fall. But this was due to slowing exports, affected by such nonquake factors as the appreciation of the yen, which rose to a postwar peak of 75.32 against the dollar in October, triggering the market interventions by Japanese authorities to stem the rise.

The yen, which had been bought by investors seeking a refuge from the debt crisis in Europe, has eased back recently to a range between 80 and 81 to the dollar thanks to the European agreement on a second bailout package for Greece, but remained stronger than the average break-even exchange rate for Japanese exporters of 82 for 2011, as publicized in a government survey.

While the quake left little lasting effect on employment and consumption, both of which have stabilized after initial deteriorations, concerns remain regarding energy supply.

The tsunami, which devastated manufacturers’ facilities, also triggered the crisis at the Fukushima No. 1 nuclear plant, leading to serious power supply shortages in the regions of Tohoku, which the quake hit, and Kanto, with Tokyo at its center. The government went as far as ordering rolling blackouts to save electricity.

The power shortages, which added to the supply-chain disruptions, adversely impacted manufacturing industries, and fears of recurrences have been growing ahead of summer, when electricity use normally peaks for air conditioning, while utilities remain unable to restart idled atomic power facilities, given safety concerns.

Utilities have rebooted thermal power generation as an alternative to nuclear energy, but rising fuel costs have led to Japan’s growing imports and added to the deterioration in the trade balance. This has sparked debate on the need for new energy development alongside a structural reform within the industry.

The quake has also pressed the government to spend a lot on reconstruction work, although it has pledged to restore the nation’s fiscal health, the worst among major developed countries. Tokyo compiled four extra budgets worth some ¥20 trillion to finance the work in fiscal 2011, which will end March 31, in addition to the initial budget of ¥92 trillion.