(EnergyAsia, August 6 2012, Monday) — Helped by an improving electricity supply outlook, the Japanese economy is experiencing a domestic-led recovery, with growth expected to reach almost 2.5% this year, said the International Monetary Fund (IMF).

However, the fund warned that it could slash this by 0.25 percentage point if the country’s electricity supply outlook falters. Furthermore, the country faces the risks of continuing turmoil in Europe and a slowing Chinese economy.

In its latest annual report on Japan issued under Article IV of its agreement with member countries, the fund said that for now, the fund the country’s electricity supply problems “appear to have lessened.”

Japan suffered a sharp drop in electricity output following the earthquake-tsunami tragedy of March 2011 which led to severe radiation leakages from one of its largest nuclear power plants. Under pressure from the public, the government shut down all 54 reactors, which supply between 25% and 30% of the country’s electricity, for safety inspections.

Despite the lower supply capacity, Japan’s electricity problems this year are expected to be less severe than last summer, said the IMF.

“This is because the economically important Kanto region around Tokyo which accounts for 40% of the nation’s GDP, has sufficient capacity to meet demand due to an expansion of thermal power plants, an increase in tariffs, and continued conservation efforts,” it said.

“The situation is, however, more uncertain in the Kansai region, where dependence on nuclear energy remains high. The region accounts for 16% of GDP and drew half of its electricity needs from nuclear power in recent years.”

To ward off any potential shortfalls, the government has imposed demand restrictions on businesses, encouraged transfers from surplus regions, and enhanced conservation efforts.

The recent re-opening of one nuclear reactor and the planned reopening of another plant in coming weeks will help fill much of the possible shortfall in Kansai.

IMF said it might have to reduce its estimate of Japan’s real GDP growth in 2012 by 0.25% percentage point as a result of the energy problems. Lower consumption and productivity, combined with higher energy costs from the switch to thermal electricity generation, could suppress activity.

The IMF warned that Japan could lose investment in energy-intensive sectors as production costs rise. Higher fuel imports will also weigh on the trade balance and increase Japan’s vulnerability to world energy price shocks.

In the long term, Japan could reduce its economic vulnerability by developing alternative energy sources.

The government is expected to soon unveil a new energy plan that could include greater deregulation of the electricity sector to encourage more regional trading of supply to address shortages. Targeted subsidies and an increase in the carbon tax could give companies an incentive to conserve energy and increase
production of alternative energy sources.