BoJ sees supply constraints easing faster than expected

TOKYO: Supply bottlenecks dogging Japanese firms are easing faster than initially expected, Bank of Japan Governor Masaaki Shirakawa said on Wednesday, reinforcing the view that the economy was recovering from a steep downturn after the devastating earthquake in March.

Factory output has tumbled due to supply chain disruptions and power blackouts, while exports and household spending fell as sentiment deteriorated after the quake, Shirakawa said.

"Those constraints, however, are being relaxed more quickly than expected initially as a result of strenuous efforts by firms," he told a seminar hosted by the central bank.

Shirakawa repeated the central bank's view that the economy is expected to resume a moderate recovery from the October-March second half of the current fiscal year as strong global growth supports exports.

His comments follow signs that the world's third-largest economy could be poised for a V-shaped recovery after the disaster knocked Japan back into its second recession in three years and a third downturn in a decade.

Carmakers such as Nissan Motor Co and Honda are making progress in restoring supply networks torn apart by the disaster, an encouraging sign for the BOJ which see supply constraints as the biggest risk for the economy near-term.

Factory output rose 1 percent last month after a record plunge in March and companies expect to crank up output further in May-June, bringing it close to pre-disaster levels.

That backs up the BOJ's view, shared by many analysts, that the economy is on track for a moderate recovery before the end of the year, helped in part by spending on reconstruction.

The BOJ eased monetary policy just days after the March disaster. It has stood pat on policy since then but has signalled its readiness to loosen further if the damage from the quake proves bigger than expected.

Shirakawa said the quake revealed the risk of companies excessively slimming inventories, or concentrating business activities and plants in certain regions for the sake of efficiency.

An over-reliance on particular plants for parts and Japan's renowned "just-in-time" system of keeping inventory at a minimum magnified supply chain disruptions, he said.

"There is no free lunch: you need to bear some additional cost in either case, to raise inventory or to diversify procurement," he said.

Shirakawa also stressed that central banks cannot push up prices "at will" just by flooding the economy with cash.

Japanese consumer prices fell 3.7 percent in the 13 years to 2010 even as the monetary base soared by 90 percent between 1997 and 2010, he said.

"Significant increases in the monetary base neither gave rise to an equally significant rise in money stock nor inflation, let alone proportional increases," he said.

Japan has been mired in deflation for much of the past decade with any temporary price rise driven by high commodity costs and tempered by consumers' weak appetite to spend.

Copyright Reuters, 2011