The world’s third largest economy has returned to growth with a relatively healthy 1% improvement in economic output in Q1 2012. Japan is still in the recovery phase following the devastating earthquake and tsunami of March 2011. The economic boost has been due in no small part to government stimulus measures designed to spur the regeneration of the devastated infrastructure in the areas worst affected by the natural disaster.
Consumer spending in Japan is also up which has helped the annualised GDP figure to come in at 4.1%; considerably stronger than the growth posted by Japan’s trading partners in North America and in Europe. Economic activity is slowing in China, the USA and Europe and this, together with an historically strong Yen is bound to have an effect on Japan’s export activities going forward. The Yen is sitting fully 20% below the level that former PM Naoto Kan identified as being desirable from Japan’s perspective. The Dollar was trading above the 120 Yen mark in 2007 before the global financial crisis struck.
The reconstruction effort following the tsunami involves an enormous investment and, in effect, acts as a stimulus to the economy. The Japanese PM, Yoshihiko Noda, has already promised more than 20 trillion Yen (about $249 billion) for the reconstruction of the affected area. In part, this means that the growth figures do not truly reflect the outlook for the economy which is strongly dependent on exports to the rest of the world. The other factor is that the expansion figures are a relative rather than an absolute measure of economic activity and they are coming off a low base.
Japan was reliant on nuclear power for about a third of its electricity production. As a consequence of the Fukushima NPP accident in the immediate aftermath of the tsunami, all of Japan’s nuclear generation is off-line waiting for tests to be completed and local permission to be granted for a re-start. The political mood is not yet ripe for nuclear power to be re-initiated, so Japan is having to increase fossil fuel imports to meet the shortfall. This move has been responsible for a rare balance of trade deficit in Japan as rising imports outweigh falling exports, drawn down by a strong Yen and weaker global demand.