Summit Notebook

Exclusive outtakes from industry leaders

Short-term hopes, long-term gloom

June 22, 2011

By Tomasz Janowski

Optimism that Japan’s economy will bounce back from a post-quake slump and pessimism about its long-term prospects is the prevailing message of economists addressing the Reuters Rebuilding Japan Summit.

The reasons for the near-term optimism are well known: strides made by Japanese manufacturers in restoring production and supply networks ripped apart by the March 11 earthquake and tsunami and expectations that sooner or later hundreds of billions of dollars spent on rebuilding the ravaged northeast coast will grease the wheels of the stuttering economy.

There is also little doubt about what has been holding back Japan, which has been in and out of deflation and recessions over the past decade.

Its society is aging faster than any other nation, the productive (and consuming) population is shrinking, its manufacturers keep shifting operations abroad where wages are lower and markets grow and its debt burden makes it impossible for Tokyo to engage in any grand-scale pump-priming.

Now, one can also add concerns that a shift away from nuclear power will bring higher costs and doubts about reliability of electricity supply and possibly accelerate the hollowing out of the manufacturing sector.

The proposed remedies are also well publicised: greater opening to foreign goods and workers, deregulation, policies making it easier for families to have and raise children, new energy policy and an ambitious overhaul of the state’s finances.

What is striking, however, is the air of inevitability with which Japanese economists talk how the rebuilding impulse will eventually fade away and after few years Japan will settle for even more meagre growth than before the disaster.

Yasunari Ueno, Chief Market Economists at Mizuho Securities summarised the prevailing sentiment: “I’m pessimistic about the Japanese economy in the long run. A chronic deflation that has plagued this country due to a decline in the working population and excess capacity is the fundamental cause of economic and fiscal problems. Looking at the political situation after the earthquake, I don’t see any movement towards resolving these problems.”

The Japanese economy plunged into its second recession in three years after the disaster, shrinking 0.9 percent in the first quarter. It is expected to contract again this quarter and then start growing again and expand at a nearly 3 percent clip in the fiscal year starting in April 2012. But it is doubtful it can maintain that sort of pace for much longer.

Photo Credit: REUTERS/Kim Kyung Hoon

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