The Bank of Japan’s biannual report on Thursday said that the Japanese economy is slowly recovering from the effects of the March 11 quake and tsunami. But it pointed out that it is unavoidable that the slowing down of overseas economies and the yen’s historic rise in currency markets will negatively impact the economy. The same day, the central bank decided to boost the size of its asset purchase scheme by ¥5 trillion to ¥55 trillion to help underpin the economy.

As of July, the BOJ had predicted that the economy would grow 0.4 percent in fiscal 2011 in real terms and that the corresponding figure for fiscal 2012 would be 2.9 percent. In its latest biannual report, it revised the fiscal 2011 and 2012 growth rates downward to 0.3 percent and 2.2 percent, respectively. It also predicted that the economy will grow 1.5 percent in fiscal 2013. The BOJ issues its biannual report in April and October and carries out a mid-term assessment of the report three months afterwards.

Although the fiscal 2011 and 2012 growth rates were revised downward, they still should be regarded as relatively high. Supply chains devastated by the March 11 disasters are recovering faster than originally expected.

But one cannot be optimistic about the Japanese economy in view of the financial crisis in Europe, the strong yen and the damage caused by the floods in Thailand to Japanese firms. The yen has climbed to a postwar high of less than ¥76 to the U.S. dollar. It is unlikely to soon fall from the ¥76 level. This may prompt export-oriented enterprises to move their production bases to foreign countries.

The third supplementary budget for fiscal 2011 is to outlay ¥2 trillion to help enterprises cope with the strong yen, including ¥500 billion subsidies to help them establish core bases for production or research and development. The government will also financially help Japanese firms to buy overseas firms. Japan needs to quickly create an industrial structure that can overcome the effect of a strong yen.

The year-on-year rise in the consumer price index predicted in the BOJ report is extremely low — 0.0 percent for fiscal 2011, 0.1 percent for fiscal 2012 and 0.5 percent for fiscal 2013 — indicating that Japan is in the grip of persistent deflation. The government and the central bank must take necessary measures flexibly to help accelerate economic recovery.

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