IMF cuts Japan growth forecast in wake of quake damage

The earthquake and tsunami have caused widespread damage to Japan's north-east coast

The International Monetary Fund (IMF) has downgraded its view on Japan's economy in the wake of the devastation caused by the earthquake and tsunami.

The IMF said it expects Japan's economy to grow by 1.4% this year, compared to a previous forecast of 1.6%.

However, the Fund said it was confident that Japan would be able to recover from the disaster and get back on track.

It has raised its projection for Japan's growth next year to 2.1%.

IMF chief economist Olivier Blanchard told the BBC that growth in Japan would slowdown in the short term, as it grapples with the massive scale of the devastation.

"This is an enormous human tragedy by any standard," he said.

Mr Blanchard added that there was a lot of uncertainty about developments in Japan, especially the nuclear crisis at the Fukushima Daiichi nuclear plant, which remains a cause of concern.

The IMF has downgraded its forecast for Japan's growth only slightly. However, analysts say they expect the economy to slow down much more.

"We expect the downturn to be larger and it will take long before the economy hits the bottom," said Masaaki Kanno, chief economist at JP Morgan Securities in Tokyo.

"We think the Gross Domestic Product (GDP) growth rate in 2011 will be revised from 1.7% to 0.8%," he added.

Supply chain

One of the biggest issues facing the Japanese economy is that of getting its supply chain back on track.

Production at some of its biggest factories has been suspended or halted as manufacturers face a shortage of parts.

The situation has been further compounded by the rolling blackouts due to a shortage of power.

Analysts say that the situation is likely to remain the same for a while.

"Due to the disruption of the supply chain, industries will remain at slow capacity ratio this month," said Mr Kanno.

Mr Kanno added that factories may gradually increase their output levels, but they will encounter more obstacles in the coming months.

"In the summer time we will have another constraint of the electric power shortage," he said.

"We expect the business activity to fully recover from September."

Rebuilding push

Reconstruction of infrastructure is likely to boost Japan's growth in the long term

While growth in Japan is expected to be hit in the short term by the devastation caused, reconstruction and rebuilding work is likely to provide a much needed impetus to the economy.

"Next year we think that growth will be a lot stronger," said Mr Blanchard.

"They will need to rebuild, so investment will go up and growth will be a bit higher," he added.

Mr Kanno of JP Morgan Securities also said that the slowdown this year will be more than offset by growth in 2012.

He said the effects of the reconstruction efforts may start becoming evident as early as later this year.

"Eventually we should expect a v-shape recovery in second half of this year," he said.

However, Mr Kanno warned that given the huge level of Japan's public debt, the government had to be careful about how it funded the reconstruction.

"That is a very difficult problem," he said.

"First the government should finance the supplementary budget by issuing debt, but eventually, at least a part of it, should be offset by a tax rate hike," Mr Kanno added.