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Japan Economy V-Shaped Rebound Depends on End to Blackouts

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A woman looks at tsunami debris in Kesennuma, Miyagi. Photographer: Tomohiro Ohsumi/Bloomberg

Japan is likely to see a rebound in the second half of this year after a blow that will be determined by the magnitude of electricity disruptions caused by the earthquake and tsunami, a survey of economists showed.

Banks are split on whether the nation will slip into a recession, with Mizuho Securities Co. saying that’s “almost certain,” and Barclays Capital not seeing a single quarter of contraction. Annualized growth will trough at 0.4 percent in the second quarter, the median forecasts of nine economists surveyed by Bloomberg News show.

“The hits to the electricity supply and extent of the hits to the supply chain are making it harder to analyze,” said Michael Buchanan, chief Asia-Pacific economist at Goldman Sachs Group Inc. in Hong Kong, who previously worked at the International Monetary Fund. The longer it takes to restore electricity, the bigger the damage, he said.

At stake for Japan’s trading partners is a resumption in exports of components and equipment used in the assembly of goods abroad, such as silicon wafers, liquid-crystal displays and electric machinery. Supply disruptions could result in an increase in business costs as companies opt to hold bigger inventories, according to Moody’s Analytics.

Regional Impact

For now, the economic impact outside Japan is likely to be limited, Buchanan said, adding that last week’s rally in government debt across the region may fade. He recommended bets on higher yields on five-year South Korean government debt. The bonds yielded 4.10 percent at today’s close, compared with the average of 4.30 percent since the start of the year.

Prime Minister Naoto Kan yesterday said there’s “light at the end of the tunnel” in the nation’s battle to avert a nuclear meltdown at a crippled power plant, which threatened a deeper shock to the nation’s consumers.

Economists at companies including Macquarie Capital Securities have yet to produce fresh gross domestic product projections in the aftermath of Japan’s record magnitude-9 earthquake and ensuing tsunami. The government hasn’t estimated the economic damage caused by the disaster, which devastated northeast areas of the country.

Government Plans

Finance Minister Yoshihiko Noda told reporters today the government is undecided on the size of the rebuilding package and will need to assess the damage first. Economic and Fiscal Policy Minister Kaoru Yosano said that bond sales, cuts to other spending and tax measures could pay for reconstruction, adding that it would be undesirable to tap public pension funds.

The catastrophe killed at least 8,649, wrecked thousands of buildings and forced companies from Honda Motor Co. to Hitachi Ltd. to suspend factories. Tokyo, which saw a limited physical impact, has been affected by an uncounted exodus of people to Osaka and abroad, with consumers still in the city stockpiling items from batteries to noodles.

“Even though panic buying of daily necessities may well prove a temporary boost to demand, the level of economic activity will be lower” because of fears of radiation from the power plant and electricity shortages, Deutsche Bank AG economists Mikihiro Matsuoka and Seiji Adachi wrote in a March 18 report.

Japan’s economy contracted in the fourth quarter, and officials previously saw a rebound in January to March. Deutsche Bank analysts now see a second straight drop in GDP, with a return to growth in April to June. “Estimates are highly unreliable at best,” they warned.

Tokyo Electric

Tokyo Electric Power Co. began rolling blackouts of Tokyo and surrounding areas after the disaster, with exact outages decided on a daily basis.

“The efficiency of global logistics chains is being challenged,” Matt Robinson, an economist at Moody’s Analytics in Sydney, wrote in a note yesterday. “The result could be a shift towards greater inventory levels in future” that pushes up costs, he wrote.

Among the variables for Japan’s economy: the blow to consumer and business confidence from a slide in stocks and appreciation in the yen, which undermines exporter competitiveness. The Nikkei 225 Stock Average has tumbled 7.9 percent since the March 11 earthquake. It rose 4.4 percent to 9,608.32 at the close today in Tokyo.

Lost Wealth

“A lot of wealth was lost as a result of the disaster, including the drop in share prices, and this will be a minus for the economy in the medium to long term,” said Susumu Kato, chief economist for Japan in Tokyo at Credit Agricole CIB and CLSA, who sees three straight quarters of GDP decline.

Japan’s currency has gained 2.5 percent since the quake, limited by the Group of Seven’s coordinated intervention to sell yen on March 18. It was little changed at 80.95 per dollar at 11 a.m. in London.

Morgan Stanley MUFG Securities Co. analysts led by Robert Feldman in Tokyo wrote in a note today that second quarter GDP will shrink at an annualized pace of 6 percent to 12 percent, depending on damage to the northeast and extent of disruptions to the electricity and distribution system. Policy makers will probably implement “several” spending packages of 10 trillion yen or more, they wrote.

“Initially the economy is likely to enter a steep recession,” Morgan Stanley said. The economy will contract by 1 percent to 3 percent in 2011, with next year’s outcomes ranging from a 1 percent shrinkage to 3 percent growth, the note said.

After Kobe

The fillip provided by private and public investment in the aftermath of the 1995 Kobe earthquake helped the economy accelerate for two years after three years of near zero growth. World Bank staff said yesterday that it may take five years for Japan to rebuild, and cited private estimates for the damage wrought ranging from $122 billion to $235 billion.

One possibility: the calamity mobilizes policy makers to address long-standing challenges such as the need to rein in Japan’s fiscal deficit, and spurs corporate leaders to ramp up investment, according to economist Simon Wong.

“It’s hard to predict -- these types of events tend to lead to something totally unforeseen,” said Wong, a former Hong Kong Monetary Authority economist who now works at Standard Chartered Plc in Hong Kong.

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