Japan sees greater hit to economy as its nuclear crisis deepens

April 13, 2011 - 0:0

Japan’s Economic and Fiscal Policy Minister Kaoru Yosano said the March 11 earthquake may result in a larger hit to the economy than previously seen, indicating a greater appetite for stimulus one month after the disaster.

“The damage to the economy may be bigger than we initially expected,” Yosano told reporters on Tuesday in Tokyo. “In addition to disruptions in the supply chain, we have the added seriousness of the situation with the nuclear power plant,” he said, referring to the Fukushima Dai-Ichi crisis that officials on Tuesday said has a severity rating matching Chernobyl in 1986.
Prime Minister Naoto Kan may need to turn to additional debt sales or to tax increases in coming months, given opposition at the central bank to funding deficit spending. A record of the Bank of Japan’s meeting last month showed on Tuesday that officials refrained from any discussion of specific additional monetary stimulus they would be prepared to endorse.
Consumers won’t be willing to spend until funds are deployed to the northeast and government rebuilding take hold, according to economist Noriaki Matsuoka.
“There’s talk of a tax hike, but that risks exacerbating the drop in consumer confidence,” said Matsuoka, an economist at Daiwa Asset Management Co. in Tokyo. “The BOJ will probably want to avoid increasing its monthly bond purchases because they think that would be similar to monetizing debt.”
------------------Bond underwriting
The central bank is barred by law from directly buying public debt from the government, and instead purchases 1.8 trillion yen ($21 billion) of the securities from lenders each month, an amount that’s been unchanged for two years.
Confidence among merchants closest to Japan’s consumers tumbled at the fastest pace in March since the Cabinet Office began tracking the data in 2000, a survey showed last week.
Analysts from Capital Economics Ltd. are now forecasting the economy will shrink 1.5 percent this year, revised from a previous estimate for gross domestic product to be unchanged.
“GDP should then rebound as activity recovers from the initial shock and reconstruction spending kicks in, but the recovery will be held back by increases in taxes and cuts in other expenditure required to help pay for the government’s contribution,” economists led by Julian Jessop, chief international economist at Capital Economics, said in a note last week.
-------------------Damage estimate
The Cabinet Office last month estimated damages from the earthquake and tsunami will be as much as 25 trillion yen, prompting several lawmakers to call for a stimulus package as large as 20 trillion yen. Those projections covered destruction to infrastructure while excluding wider implications to the economy, including how radiation will affect food and water supply.
The government will make sure that victims of the nuclear disaster will be appropriately compensated and has asked Tokyo Electric to indicate when problems afflicting its nuclear reactors will be resolved, Kan told reporters on Tuesday in Tokyo. He added that he wants opposition parties to help draft the government’s plans for reconstruction.
Japan raised the severity rating of its nuclear crisis at Tokyo Electric’s Fukushima plant to 7 on Tuesday, the highest reading. Increasing radiation has prompted the government to widen the evacuation zone and halt shipments of contaminated vegetables produced in regions surrounding the facility.
Kan is aiming to compile the first stimulus this week that chief spokesman Yukio Edano says may be as much as 4 trillion yen. Finance Minister Yoshihiko Noda has said he wants to avoid selling new bonds to finance that first package, and on Tuesday reiterated to lawmakers that it’s important for the country to demonstrate its commitment to fiscal discipline.
(Source: Bloomberg)