Japan’s production levels struggle to bounce back

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Japan may have disappeared from our front pages, but the problems the country is facing are not looking any less challenging.

Recovery of Japan’s economy is being hindered by a combination supply shortages and power cuts due to the record breaking earthquake and tsunami last month.

The biggest issue facing the economy is of its broken supply chain. Production at many of the bigger factories has been suspended as they struggle to find parts, some which used to be made in what is now the no-go zone.

The situation is affecting economies further afield than Japan, with limited component supplies from Japan forcing Toyota to halt production at five European plants for a limited time, including three British plants. Many factories both in Japan and abroad  have moved non-production days intended for later in the year forward to minimise impact of staff and hopefully, overall production.

This difficult situation has been compounded by continuing power shortages across the country due to the damage the earthquake caused to its nuclear and thermal power stations. Consequently the government asked all manufacturers to reduce their energy consumption.

Trying to maintain production levels whist cutting power consumption in a damaged economy is proving difficult. Sony Corporation is considering shutting many of its Japanese premises due to the ongoing power shortages. Nissan and Honda have both been forced to slow production at their plants.

This week the Japanese government acknowledged the breakdown in supply chains and power crises are having a negative impact of growth as the IMF downgraded its prediction of Japan’s economic growth in 2011 from 1.6% to 1.4%.

Masaaki Kanno, chief economist at JP Morgan Securities in Tokyo has a similarly pessimistic view: ‘The downturn is likely to be larger, and it will take longer before the economy hits the bottom’.

However, Japan’s economy has proved strong in the face of disaster before. After the Kobe earthquake of January 1995, Japan’s economy had a miraculous recovery, production bouncing back in March to be higher than it was in the December before the disaster.

Kobe, a port city and important industrial centre, was hit with an earthquake of a magnitude of 7.2, and suffered approximately $100 billion in damage. In a post-bubble economic torpor, Japan’s economic situation was worse then, than it is at the moment, so there is significant hope that Japan’s economy will rebound strongly.

However, with the recent earthquake measuring 9.0 and coupled with a devastating tsunami, the situation is different. With the added complication of the ongoing nuclear threat, it remains to be seen if Japan will be able to return to a normal rate of production as quickly as it did before.

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