The first rounded glimpse of the damage done to the economy of Australia’s second biggest trading partner reveals damage much larger than expected, but confidence in the recovery undiminished.
Despite record falls in industrial production in March and household spending after a big fall in retail sales as well, the damage is deeper and more extensive than any economist or analyst had thought (see below).
But the Japanese stockmarket ignored the bad news, closing up 1.6% for the day and back to the level before the quake happened on March 11. Reports that Panasonic plans to cut 40,000 employees, most of them based offshore, cheered investors, as did solid results from other companies.
As expected the Bank of Japan slashed its growth forecast for the fiscal year that started April 1, due to the impact of supply problems caused by the March 11 earthquake, tsunami and the Fukushima nuclear crisis.
In its semiannual outlook report the BOJ said its nine-member board now projects 0.6% growth in real gross domestic product for this fiscal year, compared with a 1.6% expansion forecast in its interim review in January.
For the fiscal year starting on April 1, 2012, it predicts a 2.9% expansion, against the 2% growth estimate expected in January.
That’s a bit lower than The Organisation of Economic Cooperation and Development which last week forecast that the Japanese growth would slow to 0.8% this year, compared to its previous November forecast of 1.7%.
But it saw a big rebound with growth jumping by 2.3% next year as reconstruction spending picks up.
The OECD didn’t have the latest figures on production and retail spending which were worse than anyone had expected.
The BOJ said in the report that after facing strong downward pressure in the first half of fiscal 2011, "Japan’s economy is likely to recover at a faster pace throughout the second half, partly due to a rebound from the first half, on the back of clear increases in exports and production".
Encouragingly the central bank reckons Japan will get a dose of real inflation in the coming year, breaking more than two years of deflation.
The BOJ says core consumer price index will rise 0.7% this fiscal year, compared with a 0.3% increase expected in January and the negative 0.1% reading in March over March, 2010.
The median forecast for fiscal 2012 is for a 0.7% increase versus a 0.6% rise predicted in January.
"Against this background, after facing strong downward pressure in the first half of fiscal 2011, Japan’s economy is likely to recover at a faster pace throughout the second half, partly due to the rebound from the first half, on the back of clear increases in exports and production.
"In fiscal 2012, Japan’s economy is projected to continue growing at a pace above its potential. The economic outlook greatly depends on when and at what pace the various supply-side constraints, including power shortages, are resolved.
"Examining the outlook for Japan’s economy, the economy for the time being is likely to continue facing strong downward pressure, mainly on the production side.
"It is likely to take some time to reconfigure supply chains despite firms’ ongoing efforts to restore affected facilities, carry out production at alternative sites, and secure alternative suppliers.
"Moreover, power supply shortages could put certain constraints on economic activity when electricity demand peaks in the summer.
"However, from the beginning of autumn 2011, supply-side constraints are likely to ease as the reconfiguration of supply chains will likely have made further progress and the balance of electricity supply and demand starts to improve.
"If this happens, improvements in overseas economies will lead to increases in Japanese exports and production, which in turn will once again clearly act as a driving force for economic recovery. Moreover, efforts to restore capital stock damaged by the earthquake disaster are projected to gradually provide a boost to Japan’s economy."
For Australia this means, hopefully, a small fall in exports of iron ore and coking coal in the next few months, but a rise in exports of LNG, oil and thermal coal, and then an upturn in iron ore and coking coal as Japanese steel mills recover and boost output cut by the disasters.
Already Asian steel groups (outside of Japan) in South Korea, Taiwan and China are eyeing higher shipments of steel products into Japan to meet demand the local industry can’t at the moment.
Given Australia’s big position as a leading raw materials supplier to the steel mills of the region, that’s also good news.
Earlier, the Bank of Japan kept policy steady and rejected a proposal to increase the size of its asset-buying program and detailed a lending program for banks in disaster-struck areas.
The central bank said that Deputy Governor Kiyohiko Nishimura proposed increasing the size of the central bank’s asset-purchase program by 5 trillion yen ($A60 billion) to ¥15 trillion from the current ¥10 trillion. That was rejected by majority vote, the bank said in a statement.
The central bank kept its overnight call rate range at zero to 0.1% by unanimous vote, and also broadened the range of assets it accepts as collateral from banks in regions hit by the March 11 earthquake and tsunami.
It said it will accept collateral from companies rated BBB or higher, compared to its former requirement of A or higher. And companies in the quake area can borrow up to 150 billion yen each at 0.
