As variously predicted, the “3/11 effect” on Japan’s economy is starting to kick in. And true to warnings that the impact could be far worse than feared, the latest batch of data is reasonably horrible.
Only a day after S&P signalled fresh concerns about Japan’s economy, official data on Thursday showed a far sharper plunge in March industrial production than the consensus 10.6 per cent – a whopping 15.3 per cent fall from February – while March household spending slid an annual 8.5 per cent.
Kaoru Yosano, Japan’s economy minister who famously spoke in January of his “dreadful dream” about the national debt burden, was “stunned” by the industrial production figures, according to the Nikkei newspaper. No wonder. Yosano had told the FT just days after the March 11 magnitude 9 earthquake, that the disaster would have little impact on Japan’s economy.
But there was more to give Yosano nightmares on Thursday. Alongside the output and household spending figures came news that housing starts fell for the first time in 10 months, down 2.4 per cent in March from a year earlier. That followed Wednesday’s report that Japanese retail sales suffered their biggest fall in 13 years in March, down 8.5 per cent from a year earlier.
The normally cautious Bank of Japan, meanwhile, slashed its growth forecasts on Thursday to just 0.6 per cent for the year to March 2012, down from 1.6 per cent and way below the IMF’s recently revised estimate of 1.4 per cent.
From the FT on Thursday:
Japanese factory output suffered a record decline in March as the devastating tsunami crippled supply chains across the world’s third-largest economy.
The government said production plummeted 15.3 per cent in March from February, the biggest decline since records began in 1953, and worse than analysts had expected. Household spending dropped 8.5 per cent from a year earlier.
The Bank of Japan on Thursday forecast that the Japanese economy would grow 0.6 per cent in 2011, a one percentage point decline from its previous forecast of 1.6 per cent growth. The central bank also kept interest rates at close to zero.
But wait, Yosano – ever the optimist – told the Nikkei on Thursday that the recovery of Japan’s supply chain (which he described as “a matter of life and death”) would be faster than expected because companies were “working day and night” to recover.
He added that it was too early to consider economic stimulus measures and that the state of the economy “needs to be observed for now”.
But with factories, warehouses and transport routes disrupted throughout northeastern Japan, we’re wondering what “faster than expected” really means.
Toyota, for example, recently estimated it would take eight months to restore its global production volume to normal levels. What’s more, adds the FT, the automaker – which has encountered difficulties sourcing numerous key parts and components – revealed that domestic production in March plunged 63 per cent from a year earlier.
Interestingly, the March production figures showed that while the northeastern areas directly hit by the disaster suffered a 31.9 per cent drop, the overall decline in output reflected a 13.5 per cent drop in other parts of Japan, which were indirectly affected by the crisis.
One key issue for manufacturers has been the prospect of sharp power cuts over the summer, with the closure of nuclear plants operated by Tepco, operater of the stricken Fukushima Daiichi nuclear power plant and Japan’s largest electricity supplier.
Either way, Japan’s economy is expected to slow significantly this year. The question is by how much. As seen in the gap between the BoJ’s newly revised estimate of just 0.6 per cent, and others ranging from 0.8 per cent to the OECD’s 0.8 per cent and the IMF’s more optimistic 1.4 per cent, there is much debate.
And that brings us to the biggest question of all: paying for reconstruction and extra stimulus, if required.
Prime Minister Naoto Kan last week proposed a Y4,000bn ($49bn) extra budget as what is likely to be the first of several packages to fund its estimated Y25,000bn in reconstruction costs. The sticking point is whether it will be funded by a special “reconstruction tax”. That idea has drawn strong opposition from a cross-party group of Japanese lawmakers, which is urging the BoJ to buy more government debt instead.
The first extra budget, which is relatively small, is likely to pass the Diet, or parliament, on Monday. After that, Japan heads into its string of Golden Week holidays, and little more is likely to be decided until May 9.
But when the next round of funding – the “second supplementary budget” – comes up for discussion, the gloves will come off. As it will be far bigger, “it will have more impact on the market”, as RBS Securities notes on Thursday.
That means more issuance of Japanese government bonds. But, if as RBS says, the so-called reconstruction tax kicks in, it will be used to finance redemption of further JGB issuance. And, these “front-loaded JGBs” could be help cushion the impact, reducing JGB market issuance via the usual auction process. So, it concludes, “we don’t think more JGB issuance will destabilise the market and boost yields significantly”.
Even so, JGBs and debt burdens are not the happiest stuff of dreams, so it would seem that Kan and Yosano are in for some (more) sleepless nights.
Related links:
Japan disaster coverage - FT.com
The hidden slide of Japanese business sentiment - FT Alphaville
Five reasons the yen will strengthen - FT Alphaville
Nuclear accident upgrades, economic downgrades – FT Alphaville