Japanese Production Devastated by Tsunami

Japanese government statistics show that March factory production fell a whopping 15.3% from February’s number.  Furthermore, the tsunami led to an 8.5% drop in household spending.

Analysis: Each of the above numbers set records for statistical drops in Japan and both clearly indicate an economy devastated by the March 11 tsunami.

On the bright side, the Japanese government is still predicting an expansion of Japanese gross domestic product (GDP) of 0.6% for 2011.  This compares to previous forecasts of 1.6% economic growth.  Further, the rebuilding effort in Japan will help to jump start what has been the First World’s most consistently moribund economy since the early 1990s.

In Japan businesses have traditionally been run with full employment of the citizenry as the top priority.  In most of the rest of the industrialized world businesses have been run for profit.  What this has meant is that when business is slack – and keeping every employee on the coffers difficult – the government of Japan has borrowed money to fund stimulus projects.  These projects are typically gigantic construction projects and include literally hundreds of miles of unnecessary highways.

In the short run this kind of stimulus plan can, in fact, help mitigate extremes in economic growth.  However, in the long run what happens is that economic efficiency, and therefore, economic growth, declines.  So deficit spending as a substitute for profit growth leads to an anemic economy.

Enter: the tsunami.  Now the businesses and government of Japan must spend money to rebuild the economy.  Now money has to be spent on truly economically necessary projects.  Now the Japanese can update their infrastructure for the 21st century.  But this will take time.

Japanese GDP growth has ranged between -2.0% to ~2.5% for the past fifteen years.  The tsunami has wiped out tremendous swaths of production in Japan.  Just from rebuilding alone, the Japanese economy will have to see a boost to its long-term output.

My hope is that in rebuilding that the Japanese do not simply replace lost assets, but also improve on the assets that were lost.  If they do this then the entire world will benefit from a stronger Japan.

Importance grade: 6; while devastating to Japan and many of its companies, like Toyota, the tsunami has little affect on most of the rest of the world.

Jason