Bungee economics

Japan: Japan’s economy lurched into recession in the first quarter, shrinking 0.9 per cent over the first three months of the year as March’s earthquake hit consumption and the supply chain. Forecasters, who had been expecting a 0.5 per cent fall, underestimated the impact on production far from the epicentre. But disruption is not the same as destruction. And if the negative number persuades the Bank of Japan to take action, the downturn could even presage a more dramatic recovery.

Where the earthquake and ensuing nuclear crisis caught Japan-watchers off-guard was in its effect on parts of the economy that at first seemed to be out of harm’s way. Consumers across Japan tightened their belts in sympathy, driving private consumption down 0.6 per cent, quarter on quarter. And damage to plants in northern Japan rippled across the supply chain, forcing automakers and electronics plants to cut production everywhere. That contributed to a 0.2 per cent decline in exports.

 

This is less serious than it looks. Provided global demand for cars and electronics holds up, Japan can expect output to return in the next few months. Production lines that stopped temporarily will start up again. Signs already bode well: both Nissan and Honda say plants are returning to normal more quickly than expected. Machinery orders in March unexpectedly rose 2.9 per cent. Add to that the stimulus of reconstruction investment by the government and a cash-rich private sector, and the “V” shape of Japan’s recovery should be taller, not wider.

That said, Japan would be recovering to what was already a frail state. The economy contracted in the last quarter of 2010, long before the quake. Sustainable growth depends on what policymakers do next. A start would be to expand the 4 trillion yen emergency spending package.

The Bank of Japan should also take a page from the US Federal Reserve by easing monetary policy, to promote further investment. After an initial post-quake dose of money-printing, its balance sheet has actually been shrinking. While a rebound looks likely, the last thing Japan needs is complacency.