Quake, tsunami push Japan back into recession

Tokyo: Japan’s economy shrank much more than expected in the first quarter and slipped into recession after the triple blow of the March earthquake, tsunami and nuclear crisis that hit business and consumer spending and tore supply chains apart.

Gross domestic product fell 0.9 percent in the first quarter, much more than a median market forecast for a 0.5 percent contraction.That translates into an annualised decline of 3.7 percent against a forecast of a 2.0 percent fall, Cabinet Office data showed on Thursday.

Despite the negative surprise, economists still expect the Bank of Japan to keep monetary policy steady when it ends a two-day meeting on Friday while declaring readiness to ease further if the quake’s impact proves more lasting that thought. The second straight quarter of contraction puts Japan effectively into recession with analysts projecting the economy will shrink again in April-June as supply bottlenecks triggered by the March catastrophe continue to weigh on output and exports.

Most economists still see growth resuming in the second half of the year as supplies are gradually restored and reconstruction spending is expected to kick in, thought there are still risks to such a scenario, including possible power shortages in the summer.

Economics Minister Kaoru Yosano sought to reinforce that view, saying the economy was going through a temporary rough patch.

“The economy has the strength to bounce back,” Yosano told a news conference after the data release, saying the economy should grow nearly 1 percent in the current fiscal year to March 2012.

Yosano also sided with the central bank, which said it had done enough to support the economy when it eased policy just days after the quake, doubling its asset-buying scheme, and pumped record amounts of cash into the banking system.

“The Bank of Japan is taking utmost measures allowed under the BOJ law. I have nothing to request from them,” Yosano said.

Demand still exists

Yosano stressed that in contrast with the deep and severe recession during the world financial crisis, the post-quake slump in output was caused by supply concerns, and there was still demand for Japanese goods and services.

Currency and government bond markets showed little reaction to Thursday’s data in a sign the negative surprise did not prompt a marked shift in investors’ expectations.

Economists said, however, that the data highlighted how difficult it will be for the world’s third-largest economy return to pre-quake activity levels, and many predicted only a sluggish and gradual recovery later this year.

“The effect of the disaster was very significant and it will take a long time to get back to previous levels,” said Yoshikiyo Shimamine, chief economist at Daiichi Life Research Institute.

Shimamine said growth should resume in July-September but a risk recovery could come even later, though there was no need for further monetary easing.

“The Bank of Japan has done what it needs to do in terms of emergency action, so I don’t think these figures will prompt any further action.”

Some economists said, however, the initial damage to the economy was so big that it might still need extra help.

“The size of the downturn highlights the need for much more fiscal and monetary support than has been forthcoming,” said George Worthington, chief Asia-Pacific economist with IFR Markets in Sydney.

Net exports shaved 0.2 percentage point off GDP, against the median estimate that it would trim 0.1 point off growth.

Private consumption, which accounts for about 60 percent of the economy, was down 0.6 percent against the median forecast of a 0.5 percent decline, marking the second straight quarter of decrease. Corporate capital spending fell 0.9 percent against the market forecast of a 1.2 percent decline.

While the first-quarter figures highlight how the disaster knocked the world’s third-largest economy off its feet just as it was picking up momentum, recent data supports the central bank’s base scenario of a gradual recovery.

[caption id=“attachment_12115” align=“alignleft” width=“380” caption=" Employees at Nissan Motor are working hard to restore quake-hit production to to full levels ahead of its October target. Daniel Wallis/ Reuters"] [/caption]

There were also signs that carmakers, among the hardest-hit by the disaster because of their reliance on elaborate supplier networks, were making progress in restoring production. Honda Motor said this week the recovery in parts supplies was speeding up, while Nissan Motor said it was aiming to bring production back to pre-quake levels ahead of its October target. However, declining motor vehicle production as assembly plants grapple with a shortage of parts due to Japan’s earthquake may also hurt US second-quarter growth, but much of the pain could be blunted by booming exports.

Reuters