OECD halves Japan growth forecast to 0.8%

TOKYO: The impact of last month's devastating quake-tsunami disaster will slash Japan's economic growth to 0.8% this year, the Organisation for Economic Cooperation and Development (OECD) said yesterday, halving its earlier forecast of 1.7%.

But massive government and business investment in reconstruction is expected to drive a sharp rebound in 2012, with the economy seen expanding 2.3%, up from the OECD's previous estimate of 1.3% given in a November report.

“While it is still too early to assess the full extent of the damage, the immediate impact will be to reduce output, although this will later be reversed by reconstruction efforts,” the Paris-based OECD said.

The monster March 11 quake and tsunami struck just as Japan appeared to be back on track following a slowdown in the latter part of last year, said the OECD in its 2011 Japan economic survey.

“The immediate impact of the horrendous disaster is likely to be large, extending beyond the areas devastated by the earthquake and tsunami,” it said.

“Indeed, damage to factories in the Tohoku region has disrupted the supply chains of key industrial products even beyond Japan, notably in the automobile sector.” The quake and tsunami hit facilities of many vehicle component firms and damage to nuclear power plants has resulted in severe power shortages, which have forced companies to scale back production.

But as devastating as the disaster was, the OECD said its impact on the Japanese economy was likely to be far less than that of the collapse of Wall Street giant Lehman Brothers at the beginning of the global financial crisis.

The damage “is projected to significantly reduce output in the second quarter of 2011, although it is likely to be relatively mild compared with the 20% drop following the 2008 Lehman shock,” the OECD said.

Experience from previous disasters suggested that the short-term negative impact would be followed by a rebound fuelled by government spending, firms replacing and repairing equipment and the rebuilding of damaged and destroyed housing.

“Such a pattern is projected to slow real GDP growth to 0.8% in 2011, followed by a pick-up to 2.3% growth in 2012,” it said.

Japan has said the cost of rebuilding could be as much as 25 trillion yen (US$303bil).

The OECD, however, warned that deflation was likely to remain a problem.

Japan has long been fighting a losing battle against falling consumer prices, recording a 24th straight month of deflation in February.

“Deflationary pressures are likely to remain a headwind to growth,” it said.

“The Bank of Japan (BOJ) should thus maintain an accommodative stance until deflation is overcome, paying attention to downside risks. The monetary policy framework could be improved, in part by raising the understanding' of price stability to ensure more of a buffer against deflation.”

Meanwhile, BOJ deputy governor Kiyohiko Nishimura said yesterday in a speech to business leaders in Yokohama, south of Tokyo, that supply constraints sparked by last month's earthquake would likely ease around autumn, after a power supply crunch passes, but a protracted nuclear crisis poses long-term risks to the economy.

Nishimura, while reiterating the BOJ's view that exports would begin recovering as broken supply chains mend over the next few months, sounded a fresh note of caution over power shortages and persistent troubles at the Fukushima Daiichi nuclear plant. AFP, Reuters

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