Hit to economy ‘limited’, says Yosano

Japan’s growth will barely be affected by the earthquake and tsunami, and the economy may even expand faster than expected, its economy minister believes, as spending on rebuilding shores up output.

Kaoru Yosano, minister for economic and fiscal policy, played down the economic damage from the disaster, saying the worst-affected areas – Iwate, Miyagi and Fukushima prefectures – together accounted for only 4.1 per cent of gross domestic product. Even assuming that a third of economic capacity in those prefectures was wiped out, that would represent a loss of output of just 1.2 per cent of Japan’s GDP, Mr Yosano told the Financial Times.

Spending on reconstruction was likely to add 1-2 percentage points to GDP, he calculated. Even on the worst-case scenario, therefore, the loss to GDP would amount to no more than 0.1-0.2 per cent, he said, quoting private economists, and growth could actually be higher than the 1.5 per cent originally forecast for fiscal year 2011. “It is far from what is being reported that the Japanese economy is in a miserable state,” Mr Yosano said.

While he agreed there were supply chain disruptions in the car and electronic industries, he said companies would quickly restore production. “For these basic industries ... the effect of this disaster will be quite limited,” he said.

The economy grew 3.9 per cent in 2010, its best performance for two decades, although GDP shrank 0.3 per cent in the last quarter compared with the previous three months. UBS on Wednesday downgraded its growth forecast for Japan from 1.5 per cent in 2011 to 1 per cent: its estimate for 2012 was unchanged at 2.5 per cent.

Arriving in his skeleton-staffed offices directly from a cabinet meeting, Mr Yosano, at 72 a veteran of the political scene, was dressed in the blue, quasi-military jump suit worn by cabinet ministers since the earthquake struck on Friday. Before he began to speak, in grave, almost Churchillian tones, he pulled off his rubber boots. The building, believed to be one of the least earthquake-proof government offices in Tokyo, creaked and groaned as aftershocks continued to shake the capital.

The clean-up and rebuilding bill would easily surpass the Y3,300bn spent by the government in the aftermath of the Kobe earthquake in 1995, Mr Yosano said. “This is my first instinct. The damage is much more than Kobe, so the budget will exceed Kobe’s,” he said.

“We have to rebuild. Us professional people are mean people,” he said, referring to the finance ministry’s and his own reputation for fiscal conservatism. But it was the government’s duty to rebuild the towns and villages wiped from the map, and to restore roads, bridges and other infrastructure, he said.

“This time I believe we will be very generous and understanding.”

Mr Yosano said Naoto Kan, prime minister, would have to move on twin tracks of spending amply on reconstruction while keeping the fiscal position as sound as possible. Japan’s gross public debt is about twice GDP. Tokyo plans to borrow Y44,000bn ($547bn) of this year’s Y92,000bn budget.

The minister would not be drawn on whether the government might use a sense of national crisis to push for increasing consumption tax to help pay for reconstruction. Mr Yosano supports raising the tax from its current 5 per cent.

Tokyo Electric Power Corporation, the operator of the stricken Fukushima Daiichi nuclear plant, was producing only three-quarters of the 41m kW demand at this time of year, he estimated. However, he hoped that the company would be able to reactivate coal, oil and gas power stations quickly, adding roughly 7m KW.

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Yen at highest level against dollar since war

The yen rose to its highest postwar level against the dollar on Wednesday, to Y76.36, eclipsing the old record of Y79.70 set in April 1995 as concerns heightened over Japan’s nuclear crisis, writes Peter Garnham.

The yen has been in demand since the earthquake and resulting tsunami that hit Japan last Friday amid expectations that Japanese insurers will repatriate funds to cover payments triggered by the disaster while other companies bring back profits to fund reconstruction.

This has boosted the yen, which has also benefited from its traditional status as a haven in times of turmoil on global financial markets.

So far this dynamic has outweighed the prospect that the Bank of Japan will keep monetary policy exceptionally loose to aid reconstruction and minimise damage to the economy, both of which would normally weigh on the yen.

The yen surged more than 4 per cent to its new high late in New York, taking its gains since the earthquake struck on Friday morning to 6 per cent – an additional worry for Japan as it faces the challenges of rebuilding.

Traders said one factor that could limit gains in the yen was the possibility of intervention by the Japanese authorities to restrain them.

Simon Derrick, head of FX strategy at Bank of New York Mellon, said one way for Japan’s Ministry of Finance to provide support to the local market and for other nations to show some solidarity would be to start a co-ordinated programme of multilateral intervention to prevent unwanted yen strength. Such a move would be the first concerted multilateral intervention campaign since 2000, when big central banks joined forces to support the euro.

Mr Derrick said a multilateral intervention programme would help smooth some of the erratic moves in the market and, more importantly, provide practical support to the Japanese stock market at a time when it was sorely needed. Following the yen’s gains on Wednesday, eyes were on central bank action.

“If nothing else, the Bank of Japan could intervene just to send a signal to the speculators that this is not a one-way market,” said Win Thin at Brown Brothers Harriman.