Nov 2nd - Japan - Economy: After the Earthquake

See full online edition of this message from the British Embassy Tokyo here

Summary

The economy has recovered from the impact of the earthquake, but there are fears of US stagnation and Eurozone volatility.

Detail

Eight months on from the earthquake, the Japanese economy has shown remarkable resilience. Both production and exports quickly recovered to almost pre-earthquake levels in June.

There was widespread fear of major electricity disruption as a result of the closing down of nuclear power stations. But intense collective self-restraint saw electricity usage down 11% across the country (and 18% down in Tokyo) even in an unusually long, hot summer. As the Japanese showed in the 1970s' oil shocks, they have a remarkable ability to respond to major crises by pulling together.

Only 10 of Japan's 54 nuclear plants are now operating. Local political opposition has prevented restarts after regular maintenance inspections. Nuclear currently accounts for around 15% (30% pre-March) of the energy mix. Without restarts, all the reactors will go off-line by spring 2012.

The key economic drivers are external. Japan's short-term economic concerns are the impact of the US balance sheet restructuring and the fiscal challenges facing the Eurozone. Exports are only 15% of GDP, but are the engine for economic growth. Japan did not have a banking crisis in 2008/9 but the slowing in global demand hit the real economy harder than in any other G7 country.

The yen has increasingly been seen as a safe haven and as a result has climbed to historically high levels against the Euro and the dollar. This has made exports expensive and the authorities are considering a range of counter-actions (currency interventions, subsidies for firms setting up in Japan as opposed to off-shoring). It is also, however, an opportunity for cash-rich Japanese firms to pursue outward investment opportunities.