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Japan recovery takes hold

May 31 2011 10:36 Reuters

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Tokyo - Japan's economy offered more signs of recovery from the deadly March earthquake on Tuesday, but Moody's ratings agency warned both growth and government action may fall short of what is necessary to bring Tokyo's ballooning debt back under control.

Industrial output rose 1% last month after a record plunge immediately after the magnitude 9.0 quake and a tsunami it set off, and companies said they planned to further crank up output in May-June, bringing it close to pre-disaster levels.

The upbeat outlook spurred talk that the world's third-largest economy could be poised for a V-shaped recovery after the disaster knocked Japan back into its second recession in three years and a third downturn in a decade.

Manufacturers' optimism, however, failed to impress Moody's which on Tuesday put Japan's sovereign debt on a watch for a possible downgrade, citing huge costs of dealing with the quake's aftermath and concerns that the government's response to economic challenges may prove inadequate.

"The much larger than initially expected economic and fiscal costs of the March 11 earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered," Moody's said. The rating agency cut Japan's outlook to negative in February and moved one step closer to a possible downgrade by putting its Aa2 rating on review.

Japan has been mired in economic stagnation for much of the past two decades and its repeated efforts to jolt the economy back to life with stimulus spending propelled public debt to twice the size of its $5 trillion economy.

Growth not fast enough

Moody's voiced doubts the Japanese economy could grow fast enough to bring down fiscal deficits given the huge burden of reconstruction and resolving a nuclear crisis at the crippled Fukushima power plant.

"These developments further hamper the ability of the economy to achieve a growth rate that is strong enough to help achieve a steady reduction in the budget deficit," it said.

It also voiced doubt whether Prime Minister Naoto Kan and his government would be capable to make good on promises to tackle the looming debt crisis with a set of tax and social security reforms.

Although Tokyo faced no immediate risk that borrowing costs would spike up, the buildup of debt could not go on forever and, if unchecked, it would reach a tipping point where markets would demand much higher premiums for holding Japan's debt, Moody's said.

"The government intends to introduce a comprehensive tax reform program in June. However, Japan's divided Diet...and the intensifying level of political challenges to Prime Minister Kan together continue to threaten to bog down such efforts," Moody's said.

Kan faces a no-confidence vote in parliament over his handling of the nuclear crisis and a deepening rift within his own party and analysts are more pessimistic than ever that any coherent reform plan was possible.

He told parliament he would stay on to resolve the worst nuclear crisis in 25 years and most political commentators think he will survive the vote.

But the looming face-off bodes ill for any form of cooperation between his Democrats and the opposition led by the Liberal Democratic Party, which had ruled Japan for most of the past half century.

The quake exacerbated Kan's problems, forcing him to juggle aid to the quake-hit northeast, controlling the nuclear crisis, securing funds for reconstruction and drafting tax reforms to cover rising social security costs.

The 9.0 magnitude quake and a deadly tsunami that lashed Japan's northeast left around 24 000 dead or presumed dead and triggered the world's worst nuclear crisis in 25 years, knocking Japan back into a second recession in less than three years.

The Bank of Japan eased monetary policy just days after the March earthquake, but it has stood pat on policy since then on the view that the economy will resume a moderate recovery before the end of the year. It has signalled, however, that it stands ready to loosen policy further if the damage from the quake proves bigger than expected.

The latest data and news from individual companies suggested manufacturers were making good progress in restoring supply networks torn apart by the disaster and managing their energy needs in the face of possible electricity shortages.

Economists however pointed to a still subdued consumer demand as reason for caution about the economy's longer-term prospects.

Underscoring lingering weakness in consumption, household spending fell 3% in April from a year earlier, after a record 8.5% annual drop seen the previous month and against a median forecast for a 2.9% annual decline, government data showed. Separate data showed wage earnings fell in the year to April 1.4%, the sharpest decline since 2009.

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