Japan 4 Months After

Four months ago, a magnitude 8.9 earthquake and a 30-foot tsunami wiped out entire towns and turned Japan into a virtual warzone. Buildings and homes that had stood for decades were flattened in a matter of hours, leaving hundreds of thousands homeless. Needless to say, it was one of the worst natural calamities in recent history.

Its economic impact was just as vicious and it wasn’t limited to Japan, either! Global markets went haywire, and with Japan being a critical link in many countries’ supply chains, the shock of the deadly earthquake and tsunami combo was felt worldwide.

Now let’s revisit Japan and see how the world’s third largest economy is doing these days.

Four months hence, it seems Japan has been able to pick up the pieces quite well. It only took a matter of days for Japan to fix key roads and highways that were ripped apart by the earthquake and tsunami. Even Starcraft 2 pros can’t rebuild their bases that fast!

As for the economy, well, you’d be out of your mind to expect it to recover as quickly as Japan fixed its infrastructure. But it has shown admirable signs of improvement, albeit over a longer period of time.

As a matter of fact, just last week, the Bank of Japan (BOJ) raised its economic assessment, the second month in a row now. It even went so far as predicting that output should reach pre-earthquake levels by the end of this quarter.

Supply-side constraints have eased greatly, allowing industrial production to shoot up and post a 6.2% surge in May. Japan hasn’t seen numbers like that since Pip Diddy had a head full of hair… I’m talkin’ over 50 years, son! In turn, this sharp rise caused a spike in exports, which we all know is Japan’s bread-and-butter industry.

Household and business sentiment seems to have lightened up, too. Spending is on the rebound and we’re seeing greater willingness to hire from some of Japan’s biggest companies. Last month, Honda and Toyota revealed that they plan to employ thousands of new workers to bump up production.

Although Japan seems to be getting back on its feet, several threats to economic growth remain. For one thing, the March earthquake and tsunami left lasting structural damage on Japan’s nuclear plants. Recall that almost two-thirds of their nuclear reactors have been shut down, resulting in electricity shortages. This prompted several Japanese companies to move their production facilities overseas, which dampened the nation’s growth potential.

Because of that, BOJ officials decided that it was necessary to downgrade their GDP forecast for the fiscal year ending March 31, 2012 from 0.6% to 0.4%.

As if these domestic concerns aren’t bad enough, Japan’s economic prospects are also in jeopardy thanks (or no thanks???) to the ongoing problems in other major economies, particularly in the U.S. and euro zone. After all, a cloudier outlook for the global economy triggered safe-haven rallies, which pushed the Japanese yen higher against its counterparts.

Taking a look at the charts would reveal that the yen is practically back to where it was immediately after the March 11 disaster. USD/JPY is sitting right at the 79.00 handle, which is roughly around the same price when the G7 leaders jointly intervened in the markets.

USD/JPY daily chart

Finance Minister Noda, who wasn’t really gung-ho about currency intervention in the past, seems to have had a change of heart when he remarked that he would continue to watch the yen’s movement carefully. Chief government spokesperson Yukio Edano also warned that the Japanese government is keeping a “close and strict watch” on the forex market.

But if Japanese officials decide to steer clear of currency intervention, the Japanese yen could see further gains in the latter half of the year as Japan licks its wounds and struggles to recover. Uncertainties in the global economy could also continue to provide support for the yen, which seems to be a better safe-haven alternative than the U.S. dollar.