By: Dr. Mike Campbell
It has just been eleven weeks since a devastating earthquake and tsunami hit Japan. The missing and dead exceed 26,000 and much of the nation’s infrastructure in the worst affected region was badly damaged. The nation has lot significant power generating capacity which is still affecting manufacturing output.
Against this backdrop, Japan has managed to post a one percent increase in factory output in April over the March figure. However, the year-on-year picture was understandably poorer and reflected a 14% fall in output on an annual basis. Despite this, manufacturers remain upbeat about their prospects and are expecting to post growth figures of 8 and 7.7% for May and June, respectively, as revealed by a survey conducted by the Ministry of Economy Trade and Industry. This bullish stance is still likely to change if issues with power supply cannot be resolved.
Additional Challenges
Another downside risk is that domestic demand may falter. Household spending declined by a record 8.5% in March and was down by 3% in April. Unemployment has also edged higher in the wake of the disaster. 4.6% of the workforce was unemployed in March and this had increased to 4.7% at the end of April. Although low in comparison with most of her competitors, Japanese unemployment continues to be close to post World War 2 record highs. Concern about unemployment is likely to cause consumers to be cautious about spending their money and tends to suppress domestic demand
Japan had a rare experience last month when the economy showed inflation for the first time in almost two years. Prices were forced higher because of dearer commodity costs, notably crude oil. Perversely, this could be good news since deflationary pressures mean that consumers delay making significant expenditures for as long as possible because they know they will be cheaper at a future date. Naturally, this also tends to dampen domestic demand.