Research Blog
Japan: Geography can be a blessing too
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Chris Scicluna, Economic Research
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1 December 2011
Geography can often seem a curse. The Great East Japan Earthquake in mid-March is an obvious case in point. As Japan’s biggest ever quake and tsunami, it was the nation’s worst post-war catastrophe, causing about 20,000 fatalities, prompting a nuclear disaster, destroying capital stocks worth well in excess of 3% of GDP and significantly disrupting the nation’s electricity supply.
From an economic perspective, the quake delivered an extremely sharp supply shock, with the damage triggering a record plunge in industrial output in March. There was a negative demand-side shock too, not least due to the inevitable hit to confidence. But Japan responded swiftly to repair key infrastructure and supply chains, and – contrary to the fears of many doom-mongers – coped ably with electricity rationing over the summer months. And as production steadily recovered so too did demand. So, although the quake caused GDP to contract in both the first and second quarters of the year, stronger exports, private investment and consumer spending helped GDP to grow by 1.5%Q/Q, the strongest rate since the first quarter of 2010, taking output back above its pre-quake level. For countries with strong institutions like Japan, such a profile for activity following a natural disaster – a marked contraction followed by a swift vigorous rebound – is exactly what economics predicts.
But with the pace of the rebound in activity in Q311 flattered by the quake’s base effects, it provides little guide to the likely path of Japan’s economy over coming quarters. Sustaining growth from now on will be much trickier. With household sentiment stuck below its pre-quake level and the labour market soft, consumption is unlikely to provide a significant impulse to growth. Moreover, with the yen having recently appreciated markedly to a post-war high against the dollar, net trade is also unlikely to make a positive contribution for several quarters. Instead, with the Diet adopting the third (and by far largest) post-quake budget last week, we see growth over the coming year emanating overwhelmingly from public investment, as post-quake reconstruction (rather than just recovery) kicks-in in a more substantive way. Based on our latest forecasts (see chart below), we now see Japanese GDP growth slowing to 0.3%Q/Q in the final quarter of 2011, and registering 2.0% in 2012 as a whole.
So, unsurprisingly, Japan’s economy is set to return to type with lacklustre growth over the coming year. But compared with many of its G7 partners, with the euro area and UK falling back into recession, Japan doesn’t look set to perform badly at all. Indeed, while not immune to the consequences of any escalation of the euro area debt crisis, Japan currently looks better insulated than many. The EU accounts for barely more than 10% of Japan’s exports, while dynamic Asia accounts for more than 50%, and Japan’s financial sector linkages to Europe are relatively modest too. So, at times like the present, being located about 10,000km from Rome and less than 1000km from China means that even for Japan geography can sometimes prove a blessing too.
Chart: Japanese GDP Growth
Source: DIR and Bloomberg
Chris Scicluna, Head of Economics
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