Japan's economy: Rise or fall?

Updated On: May 31, 2011

Japanese factory output rose a seasonally adjusted 1% in April from the previous month, led by a recovery in general and electrical machinery output, the said Japan’s Ministry of Economy, Trade and Industry. Companies polled by the ministry expect their orders to rise 8% in May, and climb 7.7% in June.

Many economists expect an economic rebound in the second half of the year as government spending increases due to reconstruction of infrastructure. The government has announced a Y4,000bn budget for the first stages of the recovery, and more support is expected later.

Report & Analysis: Japan output, jobless rate up in April [WallStreetJournal, 31 may 2011]

But this optimism may be clouded by other macroeconomic indicators pointing to broader economic weakness. The unemployment rate rose 0.1 percentage points to 4.7% in April from the previous month. Consumer demand is still weak, judging from a 3% drop in household spending, and key sectors in Japan’s export-driven economy such as the auto and consumer electronics segments are still slack.

Other issues which might mar Japan’s economic rebound include concerns about power outages during the summer peak period, as well as concerns that political infighting may delay reconstruction spending. Domestic companies are also expected to face continued supply-chain disruptions in the wake of the March 11 disasters.

Report & Analysis: Japanese production rises in April [CNN, 31 may 2011]  Update 2- Japan recovery takes hold as firms plan to boost output [Reuters, 30 May 2011]

Other countries have also been affected by the March 11 twin disasters. South Korea’s factory output slowed 6.9% compared to the same month a year ago. Korean companies said they had trouble getting key industrial components from Japan after the earthquake. Chinese manufacturers often rely on Japan for important components, and this too has caused problems in Chinese production.

Report & Analysis: Japan appears dispensible as supplier [New York Times, 29 May 2011]

However, according to the New York Times, ‘Japan may not be as crucial to the global supply chain as those first weeks after the disaster made it seem’. Global companies that buy parts and materials from Japan quickly set up a crisis task force to assess its supply network there.

Suppliers outside Japan were lined up if necessary, allowing for minimal disruption in production.  Also, culturally, domestic companies in Japan have close arrangements. This means that Japanese manufacturing suppliers may have been less likely to sell to foreign corporations, leaving non-Japanese manufacturers relatively unaffected by the disasters, implying that Japan might really be less important than expected.

In due time, big manufacturers may increasingly look to buy supplies and even set up production in countries less prone to tsunamis and earthquakes than Japan, said Professor Lincoln, director of the Center for Japan-U.S. Business and Economic Studies at New York University. And Japanese suppliers, in turn, might have to seek buyers abroad more than in the past, causing a fall in net export revenue, which could further mar Japan’s economic recovery.

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