Earthquake, aftermath push Japan into recession

The drop-off was worse than economists had expected. In a survey of 23 economists, Bloomberg News had projected an average drop of 1.9 per cent. It also marked Japan’s second straight quarter of economic contraction, leading the country into its second recession in less than three years.

In the aftermath of the earthquake, the country’s production lines were crippled and it faced a debilitating energy shortage, in part because of the subsequent shutdown at the Fukushima Daiichi nuclear plant. Economists project that Japan’s economy will shrink again in the current quarter, which ends in June, as production continues to falter and weigh on industrial output and exports.

Although demand from reconstruction is expected to lead to a rebound in the nation’s economy, many predict that things will get worse before they get better.

“Japan’s economy is expected to remain weak for the time being,” Japanese economics miniter Kaoru Yosano said after the figures were announced recently. Supply constraints were easing and reconstruction demand would most likely be felt later this year, Yosano said. Still, some data suggest that the downturn may be deep but quick. Machinery orders, an indicator of future capital spending, increased unexpectedly in March, while manufacturers said recently that they hoped to return to normal production more quickly than initially forecasted. “The economy has the strength to bounce back,” he said.

The data, released by the Cabinet Office in Japan, showed that the country’s gross domestic product shrank 0.9 per cent in the first quarter compared with the previous three months. That translates to a decline, in annualised terms, of 3.7 per cent.

The nuclear crisis at the Fukushima Daiichi plant has compounded the effects of the earthquake and tsunami by knocking out power capacity. At factories, offices and homes across Japan, people are being asked to reduce their electricity use by 15 per cent this summer.

Earlier this month, the government told another nuclear power plant to shut down until it could bolster its tsunami defenses, adding to concerns about a possible energy shortfall. A number of other nuclear reactors that ceased operating after the quake remain closed, as the government overhauls its policy on nuclear power, which supplies 30 per cent of Japan’s electricity.

More than 24,000 people are dead or missing from the March 11 quake and tsunami, which destroyed swaths of Japan’s northeast coast. The government has estimated that damage from the disaster could reach as high as 25 trillion yen, or more than $300 billion. The disaster hit an economy already weakened by years of deflation and depressed consumer spending, which made it reliant on exports for growth. Japan’s economy shrank for four straight quarters during the global financial crisis.

But Japanese exporters have been forced to cut back production in the disaster’s aftermath and race to repair their supply chains and grapple with the energy shortage.

Last week, Toyota Motor, whose operations have been severely disrupted since the quake, said its first quarter profit fell 77 percent from the same period last year.

Japan’s Nikkei 225 stock average has lost more than 7 per cent since March 11. Retail sales recorded their biggest drop in over a decade in March as uncertainties from the disaster caused consumers to avoid non-essential spending.

The Japanese economy contracted in the fourth quarter of 2010 as well. Though economists often define a recession as two consecutive quarters of decline in a country’s gross domestic product, Japan appoints a committee of academics to determine when recessions begin and end.

The Japanese parliament has approved a 4 trillion yen ($49 billion) extra budget for reconstruction, and Prime Minister Naoto Kan has promised more spending to help cushion the economic blow. Japan’s central bank has also injected record amounts of cash into money markets in a bid to kick-start spending in the economy.