OECD halves Japan 2011 growth forecast to 0.8pc

TOKYO, Apr 21 (AFP): The impact of last month's devastating quake-tsunami disaster will slash Japan's economic growth to 0.8 per cent this year, the OECD said Thursday, halving its earlier forecast of 1.7 per cent. But massive government and business investment in reconstruction is expected to drive a sharp rebound in 2012, with the economy seen expanding 2.3 per cent, up from the OECD's previous estimate of 1.3 per cent given in a November report. "While it is still too early to assess the full extent of the damage, the immediate impact will be to reduce output, although this will later be reversed by reconstruction efforts," the Paris-based OECD said. The monster March 11 quake and tsunami struck just as Japan appeared to be back on track following a slowdown in the latter part of last year, the Organisation for Economic Cooperation and Development said in its 2011 Japan economic survey. "The immediate impact of the horrendous disaster is likely to be large, extending beyond the areas devastated by the earthquake and tsunami," it said. "Indeed, damage to factories in the Tohoku region has disrupted the supply chains of key industrial products even beyond Japan, notably in the automobile sector." The quake and tsunami hit facilities of many vehicle component firms and damage to nuclear power plants has resulted in severe power shortages, which have forced companies to scale back production. But as devastating as the disaster was, the OECD said its short-term impact on the Japanese economy was likely to be far less than that of the collapse of Wall Street giant Lehman Brothers at the beginning of the global financial crisis. The damage "is projected to significantly reduce output in the second quarter of 2011, although it is likely to be relatively mild compared to the 20 per cent drop following the 2008 Lehman shock," the OECD said. Experience from previous disasters suggested that the short-term negative impact would be followed by a rebound fuelled by government spending, firms replacing and repairing equipment and rebuilding houses. "Such a pattern is projected to slow real GDP growth to 0.8 per cent in 2011, followed by a pick-up to 2.3 per cent growth in 2012," it said. Japan has said the cost of rebuilding could be as much as 25 trillion yen ($303 billion). "We are absolutely confident that Japan will overcome this problem, we in fact have been saying that we believe Japan will have a limited economic impact," from the disaster, OECD secretary general Angel Gurria said at a news conference. The OECD however warned that deflation was likely to remain a problem. Japan has long been fighting a losing battle against falling consumer prices, recording a 24th straight month of deflation in February. "Deflationary pressures are likely to remain a headwind to growth," it said. "The Bank of Japan should thus maintain an accommodative stance until deflation is overcome, paying attention to downside risks." Deflation prompts consumers to defer purchases, clouding the outlook for corporate investment and creating a drag on growth. Japanese shoppers have also been cutting back on non-essential spending in the wake of the disaster, which devastated swathes of the northeast and left more than 27,000 dead or missing.