— But Uncertainty In Forecasts High Given Unprecedented Industrial
Damage, Electrical Power Generation Shortfall
— More Radiation Leaks Would Hit Consumer and Business Confidence

By Shigeo Kodama

TOKYO (MNI) – Japan’s economy is expected to enter a soft patch in
light of the power shortages caused by the March 11 earthquake, but it
is unlikely to plunge into a long-term downtrend even in the face of the
costliest natural disaster in the country’s post-war history.

Many economists expect real gross domestic product to post modest
growth in fiscal 2011 starting April 1. However, some foresee a slight
contraction, which would be the first drop in two years after estimated
growth of about 3% in fiscal 2010.

The median forecast by eight economists polled by Market News
International calls for real GDP growth of a modest 0.4% in the coming
fiscal year, with forecasts ranging from -0.9% to +1.5% over the
previous year.

The government said last week that the massive damage inflicted by
the earthquake on Japan’s northeastern Pacific coast is estimated at up
to Y25 trillion ($309 billion), making it the costliest natural disaster
in the country’s post-war history.

The official estimate, which was the first released after the
tsunami caused by the quake devastated fishing ports and farmlands, was
based on the assumption that 80% of existing buildings and factories in
the quake- and tsunami-hit zones of Iwate, Miyagi and Fukushima
prefectures in northern Japan were damaged.

The estimated damage would exceed the toll of around Y9.6 trillion
from the Great Hanshin Earthquake, which hit western Japanese port city
of Kobe on Jan. 17, 1995.

“(The earthquake has triggered) the largest crisis since end of the
Second World War,” Ryutaro Kono, chief economist at BNP Paribas, said in
a report.

Economists said GDP in the first and second quarters of calendar
2011 will be pushed down by a fall in industrial production because
factories in northern Japan were damaged and distribution networks have
been disrupted.

But they expect GDP to rebound from the July-September quarter
onward as the positive effect of public reconstruction spending supports
private consumption and business investment.

The timing of a recovery is expected to come later than in 1995
because of uncertainty surrounding the nuclear disaster Japan now faces.
If fears of radiation leaks linger, they would hurt both business and
consumer sentiment.

In addition, manufacturing facilities for key Japanese autoparts
makers are located in the quake-hit area of northeastern Japan, choking
the supply chain for most major carmakers, domestically and
internationally.

Yuichi Kodama, chief economist at Meiji-Yasuda Life Insurance,
forecast that GDP will grow at an annualized rate of 1.8% in Q3 and 5.6%
in Q4 of calendar 2011 after no growth in Q1 and a contraction of 0.3%
in Q2.

After the 1995 quake, the government implemented three
supplementary budgets totaling around Y9 trillion, which helped GDP grow
2.3% in fiscal 1995, improving from +1.5% in fiscal 1994.

Many economists expect the government’s fiscal outlays for
reconstruction this time will easily surpass that spent after the 1995
quake, thus averting a long-term economic downturn.

The economy escaped a contraction in fiscal 1995, despite the yen’s
rise to a then-record high of Y79.75 to the dollar and a plunge in the
stock market.

However, many economists caution that Japan’s economy is likely to
remain in a soft patch for a longer period this time than it did in 1995
because of fear of potential widespread radiation leaks into the
atmosphere and ground water as well as the power shortage in Tokyo and
other big cities caused by the loss of electrical generating capacity.

Massive tsunami waves knocked out the cooling systems at the
Fukushima Dai-ichi nuclear power plant, leading to the overheating of
fuel rods and spent fuel, which has already resulted in some radiation
leakage. The shutdown of the Dai-ichi plant has forced the Tokyo
Electric Power Company (TEPCO) to impose rolling power outages in Tokyo
and eight other neighbouring prefectures, leading to reduced factory
operations and shorter retail store hours.

Economists warn that continued radiation leaks will dampen
sentiment among businesses and consumers, which in turn would hit
personal consumption and capital investment.

Consumption and capex together account for around 70% of Japanese
GDP.

Given that the combined GDP of the nine prefectures affected by the
power blackouts accounted for about 40% of Japan’s GDP in 2007, the
latest available data, the power shortage will exert significant
downward pressures on industrial production.

According to Taro Saito, senior economist at the NLI Research
institute, TEPCO’s current power capacity is 20% lower than a year ago.

If the power supply in the metropolitan area remains 20% below the
year-earlier level in April, it would cut industrial output in the month
by around 6% compared with a year before, he estimated.

TEPCO now plans to end rolling power outages by end-April, but it
may have to resume power cuts in the summer, when the use of air
conditioners is expected to boost the peak time power demand by about
15% above the utility firm’s generation capacity.

If TEPCO has to cut power supply by 15% to avoid an unscheduled,
complete blackout during a summer month, it is likely to lower the level
of industrial output by 2% to 4.8% compared to an average July or
August, estimated Junichi Makino, chief economist at Nikko Cordial
Securities.

Due in part to concern about the availability of adequate electric
power, Makino forecast fiscal 2011 GDP will fall 0.5% from fiscal 2010.

Kono at BNP Paribas sees an even larger negative impact from the
power shortage, projecting that the GDP will slump by 0.9% in the next
fiscal year.

Masamichi Adachi, senior economist at J.P. Morgan, said he is
considering revising down his +1.1% forecast for fiscal 2011 GDP as he
sees slow progress in the government’s efforts to contain radiation
leaks, while the damage to distribution networks appears to be more
serious than he initially estimated.

The following is a table detailing economists’ forecasts for real
GDP in fiscal 2011, based on a survey conducted by Market News
International (y/y, %).

BNP Paribas -0.9

Nikko Cordial -0.5

NLI Research around 0

Credit Agricole +0.1

Goldman Sachs +0.7

JP Morgan +1.1

Meiji-Yasuda +1.3

Nomura Securities +1.5

Median +0.4

tokyo@marketnews.com
** Market News International Tokyo Newsroom: 81-3-5403-4835 **

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