Japan cuts fiscal 2011 growth forecast to 0.5pc

TOKYO: Japan's government on Friday cut its economic growth forecast for this fiscal year to 0.5 percent from 1.5 percent, citing the impact of the March 11 quake, tsunami and nuclear disasters.

Next fiscal year, which starts in April 2012, the government expects growth to recover to between 2.7 and 2.9 percent in the world's number three economy, due in part to a post-disaster reconstruction drive.

The Cabinet Office report warned of risks -- especially a strong yen, which hurts exporters, as investors have rushed to the safe-haven currency amid financial market turmoil sparked by US and European debt woes.

Japan's triple calamity five months ago killed more than 20,000 people, devastated large areas of the Pacific northeast and sparked a nuclear crisis at the Fukushima plant, which continues to leak radiation into the environment.

"Our country's economy suffered a sizeable contraction in real GDP for the January-March quarter because of the impact of the Great East Japan Earthquake," said the Cabinet Office.

"The Great Earthquake caused damage to production bases in disaster-hit areas and led to a huge decline in nationwide output," said the report, which also stressed that after the quake "consumer demand plunged".

The report forecast industrial output will grow 1.5 percent, down from 2.5 percent projected earlier due to the disaster that cut supply chains and forced many companies to shutter plants and halt production.

The disaster also caused power shortfalls that have forced a summer-time electricity saving campaign. Only 15 of Japan's 54 nuclear reactors are now operating, with more due to cease operations for regular checks soon.

The impact of the disaster will see private consumption contract 0.2 percent this year from an earlier estimate of 0.6 percent growth, said the report.

Japan, with its rapidly ageing population, has been plagued for decades by a cycle of low domestic demand and falling prices.

The report also forecast an unemployment rate of 4.7 percent in fiscal 2011.

The real GDP outlook was broadly in line with one by the Bank of Japan last month. The BoJ cut its growth forecast for the year to March 2012 to 0.4 percent, and kept a projection of 2.9 percent growth for fiscal 2012.

"Looking to the future, we need to pay attention to the impact of the growing uncertainties in the global economy as well as of fluctuations of foreign exchange rates on the Japanese economy," the report added.

The yen has been hovering near its post-World War II high of 76.25 to the dollar, which it hit in turbulent trading in the week after the quake.

Last week, Japan staged a large unilateral currency market intervention, selling yen and buying dollars, in a bid to weaken its soaring currency and safeguard the nation's budding post-quake recovery.

A strong yen hurts Japan's key export sector by making its good less competitive abroad and cutting into companies' repatriated overseas earnings, prompting some firms to shift their production abroad.

Copyright AFP (Agence France-Presse), 2011