The impact of last month’s devastating quake-tsunami disaster will slash Japan’s economic growth to 0.8 percent this year, the Organisation for Economic Cooperation and Development (OECD) said yesterday, halving its earlier forecast of 1.7 percent.
However, massive government and business investment in reconstruction is expected to drive a sharp rebound next year, with the economy seen expanding 2.3 percent, up from the OECD’s previous estimate of 1.3 percent 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 earthquake and tsunami struck just as Japan appeared to be back on track following a slowdown in the latter part of last year, the OECD said in this year’s 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.
However, 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 to the 20 percent 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 fueled 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 percent in 2011, followed by a pick-up to 2.3 percent growth in 2012,” it said.
Japan has said the cost of rebuilding could be as much as ￥25 trillion (US$303 billion).
However, the OECD said 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 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.”
Deflation prompts consumers to defer purchases, clouding the outlook for corporate investment and creating a drag on growth.
Japanese shoppers have also been cutting back on non-essential spending in the wake of the disaster, which devastated swathes of the northeast and left more than 27,000 dead or missing.
“In contrast to fixed investment, private consumption is projected to remain relatively subdued during 2011, reflecting weaker household confidence ... and the impact of measures to finance reconstruction spending without increasing government borrowing,” the OECD said.
The IMF earlier this month cut this year’s growth forecast for Japan to 1.4 percent, compared with 1.6 percent before the quake.
Japan recorded GDP growth of 3.9 percent last year as the economy rebounded from a fall of 6.3 percent in 2009 amid the international financial crisis.
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