Disasters Reverse Local Japan Recovery, Report Shows

By MEGUMI FUJIKAWA And ANDREW MONAHAN

TOKYO—The March 11 disasters appear to have reversed what was looking like a nascent recovery in local Japanese economies, according to a report released Monday.
Most regions in Japan, as expected, downgraded their assessment of local economic conditions in April from three months ago, citing disruption caused by the March 11 earthquake and tsunami, a quarterly report released by the central bank showed Monday.
"Cautious views about the economy have become widespread in many regions, mainly reflecting setbacks in production following the Great East Japan Earthquake," the Bank of Japan's Regional Economic Report for April, also known as the Sakura Report, showed.
Bank of Japan Governor Masaaki Shirakawa added Monday that he expects a return to a moderate recovery path as the supply chain begins to come back, though smaller companies may face continuing problems. Japan's central bank already had downgraded its assessment of the overall economy in its monthly report for April, released last week.
Seven of nine regions reported weakness in output "mainly due to damage to production facilities, supply-chain disruptions, and constraints on the use of electricity caused by the earthquake," the report stated.
In the northern region of Tohoku, whose coastal areas were devastated by the quake and the tsunami that followed, "the economy—which had been picking up until recently—has been damaged significantly, with impairment of the social infrastructure as well as production and business facilities," the report said.
In the neighboring Kanto-Koshinetsu region, which includes the Tokyo metropolitan area, some prefectures are suffering from the effects of the continuing crisis at the Fukushima Daiichi nuclear power plant.
Farming and fishing industries have been hit by shipping bans imposed after radioactive materials were found in some products, and sales even of goods not contaminated by radiation have dropped as consumers shun products from the region altogether.
The Sakura Report—akin to the U.S. Federal Reserve Board's beige book—is based on data gathered by the BOJ's regional research divisions. The report was released at Monday's quarterly meeting of the central bank's branch managers.
In a sign of sluggishness even before the quake, core machinery orders in February were down 2.3% from January, another report showed. The fall in machinery orders, a leading indicator of corporate capital investment, is part of a string of negative signs. Businesses must invest to rebuild destroyed or damaged factories, but plummeting consumer confidence, power outages and concerns surrounding the crisis at the Fukushima Daiichi nuclear power plant may drag on capital expenditure, which accounts for around 15% of the economy.

"Demand may not recover smoothly amid strong concerns over power shortages, so there's a high chance that machinery orders and other capex indicators will be in a downtrend for a while," said Takeshi Minami, chief economist at Norinchukin Research Institute. "It may not be until at least the fall that recovery strengthens."
The 2.3% drop was more than double the 1.1% median forecast of economists surveyed by Dow Jones Newswires and the Nikkei, and followed rises of 4.2% in January and 1.7% in December. While manufacturing orders rose 11.1%, nonmanufacturing orders fell 4.5%, and overseas orders plunged 10.1%.
"The market is feeling quite nervous," said Okasan Securities strategist Hideyuki Ishiguro. "If February is this bad, post-quake March will be even more severe."
On Friday, the government reported that the main index from the March "economic watchers" survey—which covers sentiment in the domestic economy, especially the service sector—was at 27.7, a record one-month plunge from February's 48.4, and the lowest since 19.4 hit in February 2009.
The industrial sector also is expected to be hit by power-supply shortages due to the quake and the continuing problems at the Fukushima Daiichi nuclear plant. The government has decided to order big businesses to curb electricity use to prevent summer power shortages, which is expected to hit production.
Core orders exclude ships and equipment ordered by electric power companies, which are typically large and can swing from month to month, obscuring the underlying trend.
To temper the economic blow of the disasters and to help reconstruction, the BOJ has offered measures that include a special lending facility—laid out at the end of its policy-board meeting last Thursday—that makes ¥1 trillion ($11.82 billion) of inexpensive funds available for banks in the affected areas