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Japan: March data begins to reflect the extent of the earthquake

April 29, 2011

Data released during April started to show the scale of the earthquake impact on the economy. If right after the quake the shared view among the analysts was that of a limited economic impact, the updated outlook is less upbeat, and sees a greater downturn. The disruptions in the supply chains had a particularly strong impact in the automotive sector, a pivotal sector in the Japanese economy. In March, industrial production of vehicles (cars, trucks and buses) plunged a seasonally adjusted 54.2% over the previous month, while the output of vehicles parts contracted 40.4%, pointing to a shortage in the overseas' plants. The number of exported vehicles slipped 21.2% in March from the previous month reflecting the extent of the catastrophe. In total, industrial output contracted 15.3% over the previous month. Owing to the uncertainty regarding the power generation in the coming months (the energy-consumption intensive summer months in particular), analysts expect industrial production will not recover as quickly as previously expected. Next to the dropout of the nuclear power plants in Fukushima, several other power plants are also reporting issues that could threaten regular electricity supply going forward. The Kashiwazaki-Kariwa nuclear power plant (the world's biggest nuclear generating station), which was completely shut down for 21 months following an earthquake in July 2007, will take longer to return to full capacity, as the government is implementing stricter safety measures. In order to reduce power outages to a minimum, the trade ministry announced a power reduction target of 15% in areas served by the damaged plants. Moreover, Tokyo Electric Power Company (TEPCO) will boost its thermal power generating capacity in particular during the summer season. Individual companies are unveiling other energy-saving measures such as changing working hours and regulating air-conditioner use. On 29 April, the parliament passed a JPY 4 trillion (USD 49 billion) disaster relief budget. It will be the first of planned packages to finance reconstruction measures, which include removing debris, building temporary housing, supporting business and repairing damaged infrastructures. The extra budget will be financed by spending cuts in other budget entries. However, the government may need to issue new bonds to finance further supplementary budgets, adding further strain to the already stretched debt position, which reached an estimated 204% of GDP at the end of 2010. With interest rates close to zero, the sustainability of the Japanese debt burden is not an issue at present, but given the size of the total debt even a marginal increase in interest rates could question the medium-term prospects of government finance. Moreover, Standard & Poor's has cut the country's sovereign-rating outlook to negative, which threatens to drive rates higher. In a separate move, on 28 April the BoJ slashed its GDP growth forecast for the current fiscal year from an earlier projected 1.6% to 0.6%. At the same time the Central Bank lifted its projection for 2012 from 2.0% to 2.9%, backed by an anticipated surging domestic demand brought on by the reconstruction works.


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