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Deadly quake a crushing blow to Japan's recovery

For Japan's stressed and moribund economy, the strongest earthquake ever recorded hit at a brutal time.

In addition to the calamitous loss of life and property that has yet to be fully accounted, Japan's continuing efforts to break free from two decades of economic decline have been dealt a mighty blow by the natural disaster.

Japan is still smarting from being surpassed by China last year as the world's second-largest economy and its government is straining under an enormous public debt of ¥919.16-trillion, or $10.9-trillion (Canadian).

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While the economic damage caused by the quake and tsunami have yet to be tallied, one thing is certain. Japan's government will have to fund billions of dollars worth of reconstruction and aid, making a dire sovereign debt situation even worse. The odds of a fiscal crisis have increased substantially.

"The government is going to have to come up with a lot of money to rebuild infrastructure, for social support payments, for emergency construction loans and all the things that governments have to do after a tragedy like this," Carl Weinberg, chief economist at High Frequency Economics, said in an interview. "They don't have the money. They are going to have to go out and borrow more."

Almost half of Japan's government spending is currently being paid for by borrowing. And at nearly 200 per cent, Japan's debt-to-GDP ratio is by far the highest among major developed economies.

"They are not in a sustainable position at the moment," David Rea, Japan Economist at Capital Economics in London, said in an interview.

Japan's economy had recently been showing signs of a recovery, posting overall growth of 3.9 per cent in 2010, the fastest in 20 years. However, optimism was tempered by the fact that GDP actually contracted 0.3 per cent in the last quarter of the year compared with the previous three months.

The government of Japanese Prime Minister Naoto Kan had been working on a plan to reduce Japan's crushing budget deficit. Currently, about 25 per cent of the government's budget goes to servicing the debt.

"With the additional spending that will be required for the cleanup operations, it's going to add an extra cost that will set back any sensible [debt]adjustments a number of years," Mr. Rea said.

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Still, concerns about Japan's monstrous public debt are always tempered by the fact that more than 90 per cent of Japan's government bonds are held domestically. And with borrowing costs near record lows, the cost of servicing added debt will be minimal.

Yet Japan's low interest rates also demonstrate the lack of monetary policy tools available to Japan's central bank to stimulate the economy following the disaster. When the Great Hanshin-Awaji earthquake hit Kobe in January, 1995, it killed more than 6,400 people, left more than 300,000 homeless and caused damage estimated at $100-billion (U.S.). In response, the Bank of Japan lowered interest rates by 75 basis points to help soften the economic blow of the terrible quake. (A basis point is 1/100th of a percentage point.)

"No such monetary option is available today" with the central bank rate near zero, said Rob Carnell, chief international economist at ING. The Bank of Japan moved up its monetary policy decision to Monday from Tuesday, "and they may manage to contrive some form of additional support," Mr. Carnell said.

Early reports suggest the impact of damage and loss of life will be less than the Kobe tragedy in 1995. However, the sheer force of the 8.9-magnitude quake, the devastating tsunami and major aftershocks brought large parts of Japan's economy to a standstill.

Auto makers including Toyota, Nissan and Honda closed plants. More than 30 people were injured and at least one worker was killed when a wall collapsed at a Honda Motor Co. research facility in northeastern Tochigi prefecture, Associated Press reported. Electronics giant Sony was also forced to shutter some production.

Takuji Okubo, chief Japan economist at Société Générale predicted the quake could reduce Japan's gross domestic product by 1 per cent. "There are obvious reconstruction demands, and private consumptions should strengthen as households replace lost consumer durables. We do expect a sizable loss for March, 2011, but a strong rebound is likely to follow," Mr. Okubo said in a note.

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Japan's GDP grew by about 1 per cent in the three quarters following the Kobe earthquake in 1995, but Japan's Nikkei stock index plunged by about 20 per cent, owing in part to the surging value of the yen.

Share prices are sure to be hit hard again as Japanese companies trim profit and growth estimates in response to the disaster. The value of the yen is expected to rise, at least in the short-term, as insurance firms and Japanese companies repatriate funds to pay for claims and rebuilding.

Japan is the world's third-largest commodity consumer behind China and the United States. It imports nearly all of its daily oil consumption of 4.4 million barrels. At least one major refinery was damaged in the quake.

Big earthquakes tend to increase energy consumption, said Lejla Alic, an economist with the U.S. Energy Information Administration. Following the Kobe quake in January, 1995, energy consumption increased 12 per cent in February and 5 per cent in March, before returning to prequake levels in April.

In addition to oil producers, forestry firms could see an increase in demand for timber and wood products.

"We expect major rebuilding in Japan and other areas that had been hit by the tsunami over the next 6-12 months (with majority of the rebuilding to use wood as the major construction material as it is more earthquake resistant than concrete). This should have positive impact on most of the timber, lumber and building materials stocks," Dundee Securities Corp. analysts Richard Kelertas and Kevin LeBlanc said in a report.

With files from reporter Nathan VanderKlippe in Calgary

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About the Author
Asia-Pacific Reporter

An award-winning journalist, Andy Hoffman is the Asia-Pacific Reporter for Canada's national newspaper, The Globe and Mail. More

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