Downgrade threat hanging over Japan despite recovery

Japan's economy offered fresh signs of recovery from March's deadly earthquake yesterday but the country may struggle to avoid a downgrade of its sovereign debt rating.

Government figures revealed that industrial output rose 1 per cent in April after a record plunge immediately following the devastating quake and tsunami. Firms said they planned to crank up output further in May-June, bringing it close to pre-disaster levels.

Analysts said the data suggested that things were improving for Japanese manufacturers, although output in April was still 14 per cent lower than a year earlier.

Kyohei Morita of Barclays Capital said a "V-shaped" recovery may have begun last month rising through July and August. March's natural disaster knocked Japan - the world's third-largest economy - back into its second recession in three years and a third downturn in a decade.

However, ratings agency Moody's yesterday warned both growth and government action may fall short of what is necessary to bring Tokyo's ballooning debt back under control.

"The much larger than initially expected economic and fiscal costs of the 11 March earthquake are magnifying the adverse effects imparted by the global financial crisis from which Japan's economy has not completely recovered," Moody's said.

The agency cut Japan's outlook to negative in February and moved one step closer to a possible downgrade by putting its Aa2 rating on review.

A lack of consensus between Japan's government and main opposition party on fiscal policy following the earthquake also suggests that a downgrade is likely, noted Tom Byrne, the agency's senior vice-president and regional credit officer.

Moody's is due to complete a review within the next three months.

The earthquake and tsunami left more than 24,000 people dead or presumed dead and destroyed hundreds of factories in north-east Japan, forcing manufacturers such as Toyota and Sony to suspend production.

One of the sectors hardest hit has been car manufacturing, particularly the impact on supply chains after Japanese carmakers, both at home and overseas, were forced to suspend production.

Earlier this week Toyota said production at its Japanese plants had reversed 74.5 per cent in April compared to last year.Honda reported a fall of 81 per cent.

Economists see a rebound in car manufacturing as one of the key drivers in getting industrial output back towards pre-quake levels.

Underscoring the lingering weakness in consumption, yesterday's figures showed household spending fell 3 per cent in April from a year earlier, after the record 8.5 per cent annual drop recorded the previous month, while wage earnings fell 1.4 per cent in the year to April - the sharpest decline since 2009.

Meanwhile, Japan's unemployment rate in April rose for the first time in six months, edging up to 4.7 per cent from 4.6 per cent in March due to job losses in the retail and wholesale sectors, the government said.