Japan's Recession Returns

by: Edward Hugh

Japan's economy has fallen into recession again with two consecutive quarters of negative GDP growth. Gross domestic product contracted 0.9% during the January-March quarter, marking a 3.7% annualized drop, the cabinet office reported Thursday. A drop in domestic demand took 0.8 of a percentage point off growth last quarter. Business investment fell 0.9% and consumer spending declined 0.6%. GDP shrank a revised annualized 3.0% in the October-December period. Clearly the earthquake/tsunami/nuclear crisis had a major impact in Q1 2011, but it is intriguing that the drop in that quarter was not that much greater than in Q4 2010. It is very possible that the Q1 figure will be revised to an even greater decrease.

The eastern half of the country will have to deal with severe electricity shortages for quite a while, as electric power is difficult to shift from other parts of the country due to incompatible transmission systems as shown in this chart of the country's power grid from Wikimedia:


The New York Times nicely summarizes the impact of such shortages:

Besides the dangerously disabled Fukushima Daiichi nuclear power plant, three other nuclear plants, six coal-fired plants and 11 oil-fired power plants were initially shut down, according to PFC Energy, an international consulting firm.

By some measures, as much as 20 percent of the total generating capacity of the region’s dominant utility, the Tokyo Electric Power Company — or an estimated 11 percent of Japan’s total power — is out of service.

Until all the lost or suspended generating capacity is replaced, economists say, factories will operate at reduced levels, untold numbers of cars and other products will go unbuilt and legions of shoppers will cut back their buying

The power shortages may last quite a long time; some experts are predicting that Japan's shortage of electricity may last two or three years and that production slowdowns will continue in many sectors such as automotive, semiconductors, electronics, special chemicals, machinery, and precision equipment. This seems likely to reduce the chances that GDP growth in Q2 2011 will be positive year on year.

In addition, it appears that turf battles and government inertia are hobbling the cleanup effort:

More than two months after the Great East Japan Earthquake, piles of debris created by the ensuing tsunami remain untouched throughout disaster-hit areas.

Municipal governments have consigned most removal work to local companies, a practice that disaster-management experts say is delaying cleanup efforts. Calls are increasing for the central government to play a more active role and for the debris to be removed more quickly.

It seems to me that the Japanese government has nothing more than ad-hoc responses to this crisis. They've never had any meaningful control of the nuclear crisis since day 1. There are too many simultaneous problems causing cascading additional problems. Their deliberative style of decision-making is a poor fit for a crisis that requires prompt action.