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March 18, 2011

Japanese Reconstruction Timeline

At the start of Japanese disaster, economists came out with a simple explanation as to what the impact of the earthquake would be on Japan's economy: The economy will be hit in the short-term, but GDP will grow more in future months than expected because of reconstruction.

This report from  Barclays  shows that, when the earthquake hits, production falls in the economy due to the destruction of infrastructure. Then, as cleanup and reconstruction commences, demand increases, and the economy ends up growing more as a result. Barclay's GDP projections fit this model, with Q2 GDP revised down to +0.8%, Q3 up to +3.2%, and Q4 up to +3.0%.

Uncertainty remains over Fukushima, but Japan's recovery also depends on how much the Japanese government is willing to spend.

According To Barclays:

In our view, fiscal policy is the key to moving from a phase of production decline to a phase of overall increase in demand. At this stage, however, it remains unclear when the FY 10 second preliminary budget will be compiled and how big it will be. Although private-sector reconstruction activity could pick up ahead of activity in the public sector, the rebuilding of public infrastructure such as harbors and roads will still depend on fiscal policy.

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