By: Dr. Mike Campbell

The Japanese economy contracted in the final quarter of 2010, showing that the nation’s return to expansion was faltering. The devastating natural disaster that struck towards the end of the first quarter of 2011 ensured that the nation would be bound to enter a recession, but it was likely that this would have happened in any event. A recession is defined as being two successive quarters where the economy contracts.

The earthquake and tsunami wreaked terrible damage to north east coastal Japan and left more than 20000 people dead or missing. Damage to the nation’s infrastructure and power shortages resulting from the disaster meant that industrial output was hard hit. Supply chains were disrupted and once manufacturers had used their existing supplies of spare parts, production in many sectors ground to a halt.

Figures just released for Japan’s Q2 2011 GDP are better than many analysts had predicted and are stoking optimism that the pace of the recovery in Japan is increasing. Analysts had expected to see annualised contractions of up to 2.6%, but the figure released by the Japanese Cabinet Office shows that the economy contracted by 1.3%. The quarter-on-quarter fall in Q2 was 0.3% over the Q1 contraction.

The manufacture and export of vehicles is a key sector of the Japanese economy. Major producers, Nissan and Toyota, have been able to restore their supply chains more rapidly than anticipated and this boosted the Q2 figure. Toyota’s global production of vehicles fell by 9.2% in June, but that compares favourably to the 49% fall seen the previous month. Nissan actually produced 1.9% more cars in June 2011 than it did twelve months earlier.

The high value of the Yen compared to the currencies of Japan’s major trading partners continues to be a major concern. The Bank of Japan intervened in the markets last week to weaken the Yen, but the move coincided with a major loss of investor confidence globally. Although it initially fell by 2 Yen against the Dollar, the Yen is trading fractionally below the intercession value, currently.