Japan Showing Signs of Tentative Growth

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We regularly cover the macroeconomic situations in the major trading blocks — Europe’s debt crisis has added significant weight to the relevance of covering the world’s largest internal market, but even so, events in Europe, North America and India/China have a real impact on both metal demand and risk appetite, two major drivers of metal price movements.

But one market that plays a significant role in metals production, consumption and international trade that tends to get lumped in with the rest of Asia is Japan. Still the world’s third-largest economy after the US and China, Japan has a significant impact on seaborne demand for energy and metals, as it has near-zero naturally occurring oil, coal or meaningful quantities of metallic ores.

The country was rocked by the tsunami in March 2011 and the resulting nuclear accidents at Fukushima that dramatically exacerbated the problem by limiting power production as nuclear plants were closed. Just as the manufacturing economy was trying to recover, floods in Thailand severely impacted the supply chain of many electronics and automotive firms with sub-suppliers caught up in the disaster.

As if that was not enough, Japanese exporters have been laboring under the burden of a highly valued yen, sought out by investors as a perceived safe haven following fears for the European market, banking and sovereign debt. Even so, the economy managed to bounce back at an impressive rate (for Japan) of 1.7 percent in the third quarter of 2011. So the fourth quarter’s sharp contraction of 0.6 percent from the previous quarter and by 2.3 percent in annualized terms, came as an unwelcome shock to both the markets and the authorities.

Action Taken?

The Bank of Japan reacted promptly, probably because they had been beneficiaries of evolving data and saw this coming before the numbers were released. According to Reuters, the Bank of Japan (BOJ) surprised markets by easing monetary policy, boosting its asset purchases and setting 1 percent consumer inflation as a near-term goal. The yen weakened against the dollar to a three-and-a-half month low of 78.74 yen in the wake of the BOJ easing, and the central bank increased asset buying in an effort to spur some inflation and reverse pervasive deflation.

Most analysts appear to agree with the Bank of Japan that the economy will benefit from post-tsunami reconstruction, and as producers in Thailand recover, the impact of those supply chain issues will reduce. The yen is still uncomfortably high for Japanese producers, however. While domestic consumption is said by the Economist to be ‘weak but positive,’ higher levels of imports spurred by the need for reconstruction materials and higher oil imports following the closure of nuclear facilities will continue to act as a drag on net GDP growth throughout 2012.

Japanese demand for coking coal, iron ore, thermal coal, copper ore and a raft of other minerals is therefore likely to grow this year, not by double digits, but certainly by more than the 2011 average. If the Bank of Japan can keep the strength of the yen under control, Japanese exports may also get the opportunity to play their part in the country’s recovery.

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