A year after the tragic triple disaster that hit the country, the consequences can still is felt. The impact has obviously been severe but it has been more serious than initially thought. After the tsunami of 11 March that culminated in the nuclear accident and in many other problems in the country’s energy supply, many observers have kept their growth numbers for 2011 at more than 1%. This was only based on the assumption that the consequences would play out with the same magnitude as they did during the Kobe earthquake of 1995, after which the economy recovered relatively swiftly. This time, however, the consequences obviously have been on a much bigger scale with three major events hitting the country.
The impact of the third disaster — the nuclear accident at the Fukushima plant and problems at other nuclear facilities — following the Tsunami and earthquake have had the unforeseen consequence that the power supply disruptions had longer lasting effects, not only in the affected areas but also via electricity shortages and supply disruptions nation-wide. In addition, even without these external factors, the economy was hit in March when a slow down was already evident. It should be noted that already in 4Q10 growth was declining at 0.6%. Subsequent reconstruction efforts, and the fiscal and monetary stimulus announced shortly after the triple disaster, then helped to support growth in the 3Q11 by 7.0%, after two consecutive negative quarters of –6.8% and –1.5%, respectively. However, only in 4Q11 was growth recorded at negative levels again, standing at –2.7%. This quarterly pattern shows the volatility and current challenges that the economy faces. Growth in 2012 is now expected to be significantly better, when compared to the previous year for several reasons: Firstly, the Diet has approved a stimulus package in November of ¥12.1 trn. Its considerable size of around 3.5% of GDP means that it should have an effect, even with a multiplier of below 1.
Secondly, there will be continued reconstruction efforts by the private sector, which will be leveraged by this stimulus package, although a considerable amount will be taken from current income and private reserves as well. These efforts are expected to rebuild areas affected by the triple disaster; in addition, consumer confidence should come back over the course of the current year. Thirdly, exports are expected to improve due to positive developments in Japan’s major trading partners, mainly the United States and China and, to some extent, Europe. This should have a positive impact on domestic income and consumption through a second-round effect. This expected positive development is anticipated in the current 2012 growth forecast. Some of the most recent indicators already mirror this trend as well, while remaining volatile. Therefore, the economic situation still needs close monitoring. Private machinery orders have seen a severe decline of 7.2% m-o-m in December after a strong uptick in November when they grew by 14.7%, after 3.3% growth in October.
While it was domestic orders, which increased 18.4% m-o-m, which supported November’s strong increase, domestic orders were also the main reason for pushing down orders in December, falling by 11.7% m-o-m. Foreign orders were volatile as well, increasing by 20.3% m-o-m in November and then by just 5.6% in December. This supports the observation that Japan’s main trading partners, China and the US, seem to be reversing the trend of a global slow-down, which had been observed at the end of 2011. The support from the order side already had a readthrough to the output numbers for December. Although industrial production was still negative on a yearly base in January at –0.9%, the trend was positive with December at –2.9% y-o-y and a decline of 4.2% m-o-m in November.
Exports again declined in January and at a slightly higher rate than in December. They fell by 8.0% y-o-y after a decline of 7.7% in December, which caused the first calendar year trade deficit for Japan since 1980. While the triple disaster of 1H11, a strong yen and a weakening global economy, as well as the floods in Thailand causing further supply disruptions all took their toll last year, developments in 2012 should provide improvements, particularly on a yearly base. In addition, the yen has recently weakened from around ¥77/$ to around ¥81/$, which should allow a further improvement in the competitiveness of Japanese products Encouragingly, the domestic side of the economy has also improved. Seasonally adjusted retail trade numbers have risen by 2.7% m-o-m in January, after an increase in December 1.2%. The slightly positive trend of the economy had a correspondingly positive effect on the Purchasing Managers Index (PMI), which stayed at almost the same level of 51.2 in February, compared to 51.1 in January.
The PMI for manufacturing in January moved to 50.5 from 50.7, according to Markit. More importantly, especially when it comes to its contribution to GDP, the services sector PMI increased to 51.2 in February, after 51.0 in January. So taking the most recent developments together, it should be concluded that while some areas are still in decline on a yearly comparison, particularly exports and industrial activity, there are signs of a bottoming out. Manufacturing output also seems to be supported by improving consumption. Taking the continuing deceleration into consideration, while also acknowledging an improvement in the underlying economy and the expected support of the stimulus package, growth expectations for 2012 remain unchanged and the GDP forecast for 2012 remains 1.8%.