Fresh fiscal crisis to hit Japan’s economy

Julian Harris
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JAPAN’S ability to cope with the economic costs of last week’s earthquake and tsunami was called into doubt by analysts yesterday.

“The timing of the disaster could not have been much worse,” said John Higgins of Capital Economics. “Japan’s economic recovery has lost momentum and a large part of the reconstruction costs will add to the government’s significant debt burden.”

Japan’s public debt dwarfs most peer countries and has already been forecast to reach 250 per cent of GDP in the next four years, leaving it threatened by credit downgrades.

“The scope for fiscal stimulus is much less than it was in 1995,” said Higgins, referring to the Kobe earthquake that killed around 6,000 people and led to approximately £62bn worth of damage.

Japan’s economy shrank by 0.3 per cent in the final three months of 2010, while unemployment is touching five per cent – notably high by Japanese standards. Hopes of a rebound in growth have been disrupted by the natural disaster, according to economist Chris Scicluna of Daiwa Capital.

“But that same disruption – as well as cost pressures on the construction sector during the rebuilding phase – could help to accelerate the end to Japan’s deflation that we had expected to see in coming months,” he added.

With an aging population posing an ever-growing burden on Japan’s public finances, rating agencies have sounded the alarm and warned of possible downgrades unless politicians bury the hatchet and come up with a plan.

● Stock markets
The Nikkei fell by as much as 5.8 per cent in early trading this morning to 9,657. After the Kobe earthquake in 1995, the Nikkei fell 5,000 points over six months.

● Economic recovery
Japan’s economy shrank 0.3 per cent in the last quarter of 2010. After Kobe GDP still grew by 0.8 to 0.9 per cent per quarter in the following three quarters of 1995, before dipping again.

● Fiscal problems
Government debt is around 200 per cent of GDP, posing a problem for reconstruction costs and blunting the opportunity for fiscal stimulus.