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Japanese Economy Moves Past the Great East Japan Earthquake | Yoshihisa Kitai, Chief Economist Japan Technical Information Services Corporation [Date of Issue: 29/July/2011 No.0197-0803]

Date of Issue:27/July/2011

Japanese Economy Moves Past the Great East Japan Earthquake

Yoshihisa Kitai
Chief Economist
International Exchange Department
Japan Technical Information Services Corporation

The Japanese economy is recovering from the Great East Japan Earthquake much more smoothly than expected, but Prime Minister Kan's continued presence remains the major risk to the economy.

The Japanese economy is recovering more smoothly than expected from the temporary recession following the Great East Japan Earthquake. The May Indices of Industrial Production (IIP) rose 5.7 percent on the previous month to 88.8, while a 5.3 percent jump is expected for June. If June does perform as expected, the IIP will hit 93.5, only 4.5 percent under the February peak of 97.9. Exports for early June also came in at only minus 1.3 percent Y-Y, a vast improvement on the May figure of minus 10.3 percent.

Japan's Indices of Industrial Production
Why were June production and exports almost back at pre-quake levels? First, there has been the rapid recovery of affected factories. For example, Renesas Electronics’ Naka Factory, damage to which impacted heavily on auto production, was expected at the end of March to resume production at the end of July, but with support from the various auto manufacturers, that date was pushed back to 1 June. Aside from a handful of plants suffering major damage, most affected factories came back on line through April and May. This smooth resumption of production was partly due to the weakness of seismic waves with one- to two-second frequencies?the type of waves that cause major structural damage?so that earthquake damage to factory buildings was relatively limited. The top priority placed by machinery and device manufacturers on repairing and adjusting machinery and equipment in the damaged factories also made a major contribution to the production recovery.

Second, Tokyo Electric Power Company (TEPCO) abandoning its rolling power cuts as of 29 March also had a positive effect. During the power cuts, many factories in the TEPCO area were forced to suspend operations whether or not they had suffered damage, which became one factor behind the sharp industrial production slump in March. Once that difficulty was out of the way, plants moved rapidly back to normal production.

Third, restoration of the warehouses that were the main cause of supply chain disruption was almost over by mid-April. Earthquake shaking sent stock flying in most warehouses in the Tohoku and Kanto areas, while damage to automated handling equipment hampered product shipment. However, using a human-wave strategy to clean up and maintain delivery functions had supply chains back in order in a remarkably short period of time. The main cause of what is considered to be supply chain disruption was the suspension of warehouse functions, and a key factor in minimizing post-quake turmoil has actually been the upgrading of warehouse management.

Fourth, it became possible to avoid power shortages impacting on the economy. Rolling power cuts and a strengthening push by firms to save money accelerated power-saving efforts, and in May, key offices and factories in the Kanto region were already trimming their power consumption by 20-30 percent. TEPCO also announced at the end of March that its power transmission capacity at the end of July would be no more than 46.5 GW, but that was revised upward in April to 52 GW and to 55.2 GW in May, and ultimately to 56.8 GW as at the beginning of July. Given that power demand as of July is expected to be around 10 GW down on 2010, maximum demand for this year could stop at around 50 GW compared to last year’s peak of 59.99 GW, in which case 56.80 GW will be a sufficient supply. Even if nuclear power plants, which are currently being inspected, resume operations later than expected, the Kanto region’s energy-saving knowhow can be utilized elsewhere in Japan too, so there is little likelihood of the Japanese economy being disrupted by power shortages.

Fifth, the damage offshore to the reputation of Japanese products peaked out in mid-April, with the negative impact on exports virtually disappearing in May. Radioactivity concerns initially prompted some instances of Japanese exports being blocked and foreign ships refusing to dock at Japanese ports, but as people have come to understand that the Fukushima Nuclear Power Plant accident is on its way to resolution, rumor damage to Japanese products has started to fade.

As matters stand, then, production and exports are on their way to recovery, with domestic demand virtually back to normal with the exceptions of cars and travel, while consumer electronics, food, supermarket and convenience store sales remain buoyant. May sales of 3.1 million cars (annual rate) might have topped the April figure of 2.3 million, but with supply capacity still limited, that was still well under the February 2011 level of 3.8 million units. With senior citizens in particular still reluctant to travel, the turnover from domestic travel turnover reported by the main travel agencies has plunged steeply from the February figure of 3.8 trillion yen (annual rate) to 2.7 million yen in March and 2.9 trillion yen in April.

Domestic travel turnover of Japan's major travel agencies
LCD TV shipments, by contrast, hit 23.8 million units in April and 24.8 million units in May, right up with the average annually adjusted figure for the first quarter of 2011 of 21.8 million. Air conditioner and refrigerator shipments have also remained strong. Factors behind these trends include increasing TV replacement demand in the lead-up to the planned termination of analog TV broadcasting in July, greater public awareness of energy-saving due to the rolling power cuts and a government campaign, and more people buying the latest consumer appliances for their energy performance. Chain store and convenience store sales were up on last year’s figures for April and May. Following their experience of commodity shortages immediately after the March disaster, consumers are still anxious to have sufficient supplies of food and household goods at home, and this is helping to drive retail sales.

May housing starts reached an annual rate of 815,000, up on the April figure of 798,000, and private-sector machinery orders also lifted from an annual rate of 10.2 trillion yen in April to 10.6 trillion yen in May. Housing investment and plant and equipment investment plummeted after the Lehman Shock, but have moved slowly out of their trough on to a recovery trajectory. Plant and equipment investment in particular could well pick up rapidly going into FY2012, given the large amount of cash that firms currently have on hand, and that company profits are expected to approach record highs once the impact of the quake settles down.

Japan's corporate deposit balance
While the Japanese economy is recovering steadily from the massive March damage, the issue of political instability is darkening prospects. Both the ruling and opposition parties continue to level strong criticism at Prime Minister Naoto Kan, whose limited administrative abilities were thrown into sharp relief by his handling of the disaster-hit areas and the Fukushima Nuclear Power Plant incident. Kan, however, is effectively refusing to resign, and his continued presence is preventing the Diet from returning to normal and impacting negatively on economic activities. In particular, his reluctance to allow the resumption of operations at nuclear power plants currently under inspection is boosting uncertainty as to power supply and demand. And should the Prime Minister resign and call a general election, legislating work will end up on hold for several more months. Prime Minister Kan’s continued presence is the biggest risk to the Japanese economy.

(original article : Japanese)
(For the Japanese version of this article)

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