“The Recent Financial and Economic Situations ”
May 25, 2011
Research Director,
The Japan Research Institute, Limited
Ms. Yuri Okina
My speech today will be on the financial and economic situations after the East Japan Great Earthquake, focusing on the current economic situation, its prospects, financial challenges we are facing today and various issues to be addressed in the future.
1) Current economic situation
The Earthquake suspended the steady progress towards economic recovery and the economy took a sharp downturn. The January-March GDP marked -3.7%, and the Industrial Production Index for March recorded the largest fall ever of -15.3%. The automobile industry suffered great damage, and its March output decreased by 60%, which gave further damage to the steel and chemical industries. Although corporate production plans envisioned a gradual upturn for April and May, they hovered around 80-90% of the pre-Earthquake level.
Household expenditure survey showed that consumption decreased by 8.5% from a year earlier, as consumers refrained from spending. Expensive goods and service-related industry were the most adversely affected. DI (Diffusion Index) for department stores marked -40, while travel-related industry recorded -31. The disaster stricken Tohoku region as well as the Greater Tokyo area marked sharp decline.
Tourists from overseas for April decreased by 60% from a year earlier and numbered 290,000, which further worsened the economy.
2) Economic Prospects
The downward pressure will remain for a while and the economic growth rate is forecasted to decline sharply. After that, growth rate will move into plus figures, thanks to the recovery in manufacturing output and the full-swing implementation of reconstruction work. Our Institute forecasts a dramatic recovery of +3% growth for FY 2012, a surge from around 0% for FY2011.
The following three negative factors feed into the downward pressure: decline in demand, decline in supply and the bottleneck in infrastructure. Such negative factors will exacerbate during April-June, yet they are forecasted to wane around July-September.
Looking at the first factor, declining domestic demand will remain sluggish for a while. Durable-goods spending will increase gradually, as the Earthquake survivors start to move into temporary housing in Tohoku area. The full-scale housing construction will start only in 2012. Service exports will remain stagnant, due to the critical conditions of Fukushima power plants. External demand remains strong, thanks to the growing markets in the emerging countries. Exports are forecasted to resume growing.
About the second factor, declining supply, quite a number of parts manufacturers in Fukushima, Miyagi and Ibaraki were damaged, which gave negative impact on the auto industry. Although April-June output is likely to suffer greatly, industrial production is forecasted to post positive figures during July-September. The auto industry will also recover in 6 months. As the quake-hit manufacturers had been producing industrial goods of high value, their confidence of keeping the leading position in the global market is very encouraging.
As for the third factor, the bottleneck in infrastructure requires immediate measures to be taken both by the power companies and business enterprises so that electricity shortfall will not further damage the business operations. Manufacturers adopted a new plant operation schedule or shifted their production to Western Japan to evade damages caused by electricity shortage. Therefore, it will presumably have only a limited impact on the GDP.
Other factors could hamper economic growth: Rising resource prices could deteriorate the economy; belated measures against the Fukushima power plants or reconstruction programs could exacerbate risk factors; corporate reconstruction funds are directed overseas, as companies started to move their production bases to Asia; and how the Japanese financial condition will influence its long-term interest rate.
3) Current Financial condition and challenges
Since the Earthquake, the Bank of Japan has injected over 40 trillion yen into small and medium-sized financial institutions in devastated areas. The long-term interest rate is currently stabilized at around 1.2%. Extra issuance of national bonds for reconstruction could affect the interest rates as well as the overall capital flows. Securing sound public finance is the key to maintain international confidence in the Japanese economy. The government must take immediate steps towards sound public finance as well as implement its reconstruction programs.
The Japanese yen will stay stronger for a while in the exchange markets, as investors make risk-averse decisions and the Japanese companies sell external assets or pare external investments. We forecast that the yen will gradually get weaker in late 2011, as financial deficit looms over the Japanese economy, while monetary easing policy will be prolonged.
4) Issues to be addressed in the future
Earthquake survivors lost everything, their houses, their fishing vessels or their farmlands. The pre-earthquake debts make their rehabilitation even harder. We must introduce measures that give relief to earthquake victims as well as spur their self-reliant efforts. Giving assistance for dealing with their pre-earthquake debts is needed to ease social anxiety.
Quake-hit companies are having difficulties in raising funds and immediate actions must be taken to assist them. Financial institutions in disaster areas have already posted massive losses, thus it is necessary to infuse public funds into their equity capital.
It is crucial to implement plans that revitalize the operations of SME. Feasible reconstruction plans that attract abundant private funds are the key to improve the business environment.
Before closing, let me re-emphasize that the central and local governments must draft the reconstruction plans immediately. It is imperative to cut out nonessential spending to secure a source of revenue. Coupled with measures to achieve sound public finance, the new reconstruction scheme must be comprehensible in order to get support from the international community.