Japan economy: Reconstriction

Comment about Japan´s growth setback by Robin Bew

The daunting task of getting the Japanese economy back on its feet after the natural disaster of March 2011 has suffered a setback, with the government's latest data showing that GDP contracted in the last quarter of the year. Recent flooding in Thailand didn't help, as it disrupted supply chains. The good news is that growth should still bounce back as post-tsunami reconstruction boosts the domestic economy. Exporters may continue to struggle, however, given the relentlessly strong yen and the uncertain global outlook.

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For now, though, the data paint a picture of an economy struggling to get back on its feet after the twin setbacks of the tsunami and the Thai floods. Domestic demand growth weakened abruptly in the fourth quarter, as the rebound in consumer spending and housing investment evident in the previous quarter's data was not sustained.

The latest data will reinforce doubts as to whether the rebound in the economy that ought to result from post-tsunami reconstruction will be as strong as hoped for. After natural disasters, there is typically a sharp initial drop in output that is followed by a recovery and reconstruction boom. Japan is likely to follow this pattern, but the question is whether it will gain the full benefit that usually ensues from such rebuilding. The latest data may still just mark a temporary blip in the recovery, reflecting the fact that the government's disaster response has been slow and ineffective. After a contraction in 2011, GDP growth in 2012 should still be robust by Japan's generally anaemic standards. Our most recent forecast (which predates the much weaker-than-expected fourth-quarter performance) is for growth of slightly less than 2% this year. But we are likely to revise this down in light of the latest data.

With the global economy slowing and financial risks in the euro zone still causing great concern, the outlook for non-reconstruction-related growth in Japan will remain uncertain at best. Weak demand in the developed world, combined with a strong yen, will prevent Japan's exporters from playing a bigger role in driving economic growth. In fact, as reconstruction (even if disappointing) will continue to support imports to a significant degree in 2012, net exports are likely to act as a drag on overall GDP this year. This will particularly be the case in light of the increased need for energy imports because of lower nuclear output.