The news from Japan on Thursday reinforced some of the worst fears about the state of the economy, but not everyone is gloomy — far from it — although the latest growth figures are truly horrible.
As the FT reports:
Japan slipped back into recession after the economy contracted sharply in the first quarter, underscoring the vulnerability of the world’s third-largest economy after the March 11 earthquake and tsunami.
Japan’s GDP shrank 0.9 per cent in the first quarter from the previous quarter, according to preliminary government figures on Thursday, even though the natural disasters struck less than three weeks before the end of the period.
Indeed, although things were already slowing in the preceding quarter, the real shock appears to have been the impact of the three weeks of near-paralysis in eastern Japan following the March 11 disasters.
As independent analyst Pelham Smithers of PSA says in a Thursday note, the figures highlight the scale of the damage done to the Japanese economy which, given that the earthquake and tsunami occurred 10 weeks into the quarter, “is a scarily large figure and begs the question as to how bad it will be in the 2Q”.
The annualised decline of 3.7 per cent way exceeded the consensus of around 1.9 per cent, and dragged on the market, although with the Nikkei 225 Average closing down 0.4 per cent, not nearly as much as might have been feared.
At the same time, the yen barely budged, hovering around Y81.70 against Wednesday night’s Y81.69 ahead of the data release. Some analysts echoed the view of economy minister Kaoru Yosano, who said the contraction could be a “temporary phenomenon”.
That view, however, should be taken in step with Japan’s very different take on the definition of “recession”. As Bloomberg notes:
Economists typically define a recession as two consecutive quarters of contraction. The Japanese government instead determines recessions by having a committee of academics decide when recoveries and retreats begin and end.
Whatever the committee decides, some of Yosano’s colleagues are not giving much cause for optimism. On Wednesday, Banri Kaieda, economy and trade minister, told journalists that along with supply chain disruption and possible power shortages that had led the government to request users cut demand by 15 per cent, the economy was also threatened by rising international fuel prices.
The FT, however, points out that despite the poor GDP figures there are some signs of recovery. The Reuters Tankan – a monthly measure of business sentiment modelled on the Bank of Japan’s own Tankan survey – issued this week showed the mood among manufacturers improving.
On top of this, adds the FT, the very scale of the disaster, which the government estimates destroyed between Y16,000bn ($196bn) and Y25,000bn worth of capital stock, “means that reconstruction should propel the economy in coming quarters”.
Others are even more optimistic.
Yes, the GDP fall was “larger than we expected”, says Masamichi Adachi, JPMorgan’s Japan economist. But, he adds in a Thursday note, consider that the fall in economic activity was largely due to supply constraints:
Ahead, monthly data and anecdotal information suggest that that economic activity has bottomed in March and an improvement likely will continue. Since the starting level is so low, GDP is expected to contract in quarter on quarter basis again in 2Q. But, given the larger than expected fall in inventories at the end of March, the risk to our 2Q growth forecast at -3.5% ar skews to the upside, although there is some downside risk to final demand. We maintain our bullish 6.0-6.5% forecast for 2H of this year.
Similarly, RBS Securities Japan concludes that the larger-than-expected GDP contraction “stemmed largely from special factors such as solid growth in imports and the sharp decline in inventory investment”. In particular, it notes, inventory investment pushed overall GDP down a quarterly 1.7 per cent, in part reflecting the reduction of crude oil stockpiles and the effect of production halts on inventories. While that may signal that inventory restocking could partly push up imports and intermediary goods production in Q2 and beyond, while exports continue to fall, RBS adds:
However, we don’t believe this contrary development in exports and imports to continue. Rather, we expect exports to retrieve its positive trend on healthy overseas demand alongside the increase in imports from the latter half of 2011.
Goldman Sachs meanwhile tempers its optimism — that real GDP growth will bottom in the second quarter — with caution, particularly on prospects for recovery in exports, noting:
We think depressed production due to supply chain damage will be at its strongest in 2Q 2011 and we see 2Q as the bottom for real GDP growth. The duration of decline in consumer sentiment will be a key point. We expect GDP to return to positive growth in 3Q, buoyed by reconstruction demand in both the public and private sectors. We assume that production and exports will shift to mild growth facilitated by supply chain restoration, although power supply is an uncertain factor. One cloud on the horizon is our Global Leading Indicator. This leading indicator for Japanese exports has been losing momentum.
Related links:
What Japan’s post-quake data say so far – FT Alphaville
BoJ: A more focused ‘QE3′, Japanese style - FT Alphaville
The hidden slide of Japanese business sentiment - FT Alphaville
Five reasons the yen will strengthen - FT Alphaville