Sunday, May 22, 2011

Japan Economic Outlook Cloudy

Uncertainties over lingering disruptions to supply chains, weak spending from an anxious consumer base and a growth rate shackled with a first-quarter loss--the economic recovery after the March 11 disaster is looking dim, many analysts have said.

The nation's gross domestic product shrank a shocking 3.7 percent on an annualized basis in the first quarter of the year, according to Thursday's government announcement, indicating the Great East Japan Earthquake dealt a much bigger blow to consumer and corporate spending than previously thought. GDP is the total value of goods and services produced domestically.

Although many manufacturers remain troubled over snarled supply chains, some economists have predicted a surge in domestic demand in the coming months from reconstruction and repairs to disaster-damaged infrastructure, businesses and homes.

Most signs, however, point to a long and treacherous road before the national economy is fully resuscitated. Another major fear is a continued depression of consumer spending, which makes up about 60 percent of the GDP, caused by worries the job market will further deteriorate.

Snarled network no easy fix
"Supply chain disruptions were no doubt the largest factor" behind the worse-than-expected shrinkage of the economy in the January-March period, according to Kaoru Yosano, state minister in charge of economic and fiscal policy.

Consumers keep wallets shut
Although the mood of self-restraint that enveloped the nation following the earthquake has largely subsided, a worsening employment environment could lead to further drops in spending.

Credit Suisse Securities (Japan) took a consumer sentiment survey from April 16-21, asking people if and why they had trimmed spending. Most respondents who reduced outlays, 60.4 percent, said the cuts were "due to anxieties about the economy and income," followed by 32.2 percent who said they held back "in consideration of people in the disaster-hit areas."

The findings suggest self-restraint born of sympathy is having only a limited effect on people's spending habits.

Respondents who said they were considering buying energy-saving air conditioners, refrigerators and other appliances in preparation for possible summer power shortages stood at 19.2 percent, according to the survey.

"Since a lot of consumers are worried about the labor market getting worse, it's very possible the slowdown in consumption will continue for quite a while," a Credit Suisse official said.

GDP hobbled at starting block
Some analysts have said a sharp surge in demand in the July-September quarter because of disaster recovery projects could kick-start the economy.

But Mitsumaru Kumagai, a senior economist at Daiwa Institute of Research Ltd., has cautioned the future of the nation's economy will hinge on whether the electricity supply issue can be solved, as business activity "could be greatly affected by [a limited] power supply situation in the April-June period and afterward."

The national economy for fiscal 2010 grew 2.3 percent compared to fiscal 2009, the first year-on-year expansion in three years. The total value of GDP in the year was 538.5 trillion yen in real terms, adjusted for inflation.

Annualized GDP for the last quarter of fiscal 2010, the January-March period, however, shrunk to an annualized 534.9 trillion yen, meaning the national economy at the start of fiscal 2011 was saddled with a minus 0.7 percentage point drag on growth.

Therefore, if the economy does not grow at all in fiscal 2011, the growth rate for the year would be a negative 0.7 percent from the previous year.

Healthy economic growth could be difficult to achieve this fiscal year given the handicap at the outset.

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