Research Dept. News
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Monthly Report, num 345 - April 2011
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International review - Japan
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Japan: rising out of the ashes
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The Fukushima tragedy entails great human cost but its effect on GDP should be limited.
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The Fukushima tragedy entails huge human cost and a loss of wealth that, according to initial estimates, might exceed 4% of GDP, 1.6 times what had been lost in the Kobe earthquake of 1995. However, the effects on GDP, which is a measure of activity and not of wealth, should be limited in an economy such as Japan's, with a stronger supply than demand, stock levels that, in previous months, had recovered from their minimum levels and a population with a notable ability to recover from adversity.
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The growth forecast for 2011 remains at 0.7%.
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For 2011, we expect a growth of 0.7%, lower than the previous 1.3% due to the expected decline in the second quarter, with the second half of year and 2012 showing robust growth. The greatest risk for this scenario is a nuclear crisis at the Fukushima plant. The main hypothesis is that this situation will stabilize, but we cannot rule out the possibility of it getting worse and, as this would lead to a more prolonged interruption in energy supply, it might push GDP down in 2011.
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The nuclear industry supplies 29% of Japan's electricity, a further 66% comes from fuel and the rest is of hydroelectric origin. The damaged Fukushima I plant meets 7.2% of the electricity demand of eastern Honshu, the island that includes the conurbation of Tokyo. It's not viable to compensate the power lost with the western zone's grid, thereby forcing intermittent blackouts that should reach their peak in April. Industrial production, which in January maintained its upswing, will be directly affected in the short term. However, with the utilization of manufacturing capacity 9.0% below its historical average, we might witness a strong upswing in the second half of the year, a pattern that should also be reflected in exports, the true engine of the Japanese economy.
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Reconstruction costs will pressurize the already battered public coffers. The Bank of Japan, which intervened to guarantee liquidity in the system and stop the yen from appreciating, pushed up by the repatriation of assets by insurers and speculation, hesitates to monetize debt but the fact that the government's main creditors are Japanese should relieve pressure in the short term.
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If the nuclear risk stabilizes, the economy will pick up again in the second half of 2011.
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January's CPI remained the same in year-on-year terms, while core CPI, which excludes energy and foods, fell by 0.6% year-on-year. Although Tokyo's prices fell in February, the inflationary panorama seems uncertain with upward pressure resulting from energy and food problems.
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