Japan’s economy under threat

Continued weak production will take a toll

Customers walked in a store with fewer lights switched on to conserve energy during rolling blackouts in Tokyo yesterday. Customers walked in a store with fewer lights switched on to conserve energy during rolling blackouts in Tokyo yesterday. (Reuters/ Kyodo)
By Aki Ito and Mayumi Otsuma
Bloomberg News / March 16, 2011

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TOKYO — The steepest tumble in Japan’s stocks in a quarter-century threatens to worsen damage to the economy from last week’s earthquake and tsunami in a crisis policy makers have yet to contain.

Though the Nikkei opened this morning up 6 percent, it fell 16 percent the past two days, the most since 1987, as power outages forced companies to suspend output and officials warned of rising risk of radiation from a nuclear plant.

Bank of America-Merrill Lynch further cut its forecasts for gross domestic product, which shrank last quarter.

“The earthquake’s damage on the economy’s much, much larger than we originally thought,’’ said Masaaki Kanno, chief Japan economist at JPMorgan in Tokyo. “Continued stock turmoil and disruptions to production will drive the economy into an extremely severe state.’’

With the fiscal year-end coming March 31, the share slide may weaken corporate and bank balance sheets, while the damage to confidence risks an erosion in spending beyond the immediate hit from the March 11 catastrophe. More robust asset purchases from the central bank and a quicker effort to assemble a fiscal stimulus package could help assuage the damage, analysts said.

“Given that Japan is in an unprecedented emergency situation now, the central bank should also do something unprecedented,’’ said Naomi Hasegawa, a senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities Co. “There’s a chance the BOJ could call an emergency board meeting to add more monetary stimulus’’ before the end of the month.

Market turmoil continued after the Bank of Japan eased policy and poured a record $184 billion of cash into the financial system on Monday. As he boosted the central bank’s asset purchase program by $62 billion, Governor Masaaki Shirakawa warned the BOJ had to avoid underwriting government debt to maintain its credibility.

The Nikkei 225 closed at 8,605.15 yesterday, retreating for a third day since the quake and tsunami.

Three days of equity declines have wiped almost $700 billion from the market value of equities in the bourse’s first section. Meantime, government default risk soared to the highest on record, according to data from CMA that goes back to 2004.