Outlook for 2011-15

• The devastating earthquake and tsunami that struck Japan on March 11th will have a profound effect on domestic politics, as it has already silenced speculation about an early general election.
• The disasters have given the prime minister, Naoto Kan of the ruling Democratic Party of Japan (DPJ), a second chance, although a mishandling of the nuclear crisis could cause public confidence in the DPJ to drop sharply.
• The recent disaster has ended the deadlock over the budget for fiscal year 2011/12 (April-March), as well as producing a supplementary budget to cover the costs of rescue and reconstruction operations.
• The Bank of Japan (the central bank) has reacted to the catastrophe by maintaining its near-zero interest rate policy and announcing a slew of emergency measures. Interest rates are unlikely to rise until 2012.
• The loss of consumer and business confidence owing to ongoing nuclear safety concerns has prompted the Economist Intelligence Unit to revise down its GDP growth forecast for 2011 to 1%, from 1.4% previously.
• We have revised up our forecast for consumer price inflation in 2011 to 0.7%, from 0.6% previously, owing to supply-side factors, but this does not imply any fundamental change in Japan's deflationary environment.

Monthly review

• The earthquake and tsunami have benefited Mr Kan in the narrow sense of preserving his premiership from the ignominious fall that had previously seemed imminent.
• Mr Kan has, however, been criticised by some for intervening in a number of small matters in a manner that has retarded the rescue effort relating to both the natural disasters and the nuclear situation.
• The first round of previously scheduled prefectural and municipal elections was staged on April 10th, and the results of the polls revealed considerable dissatisfaction with Mr Kan's recent performance.
• In late March senior members of the DPJ met with their counterparts in the main opposition Liberal Democratic Party and agreed on the broad outlines of the necessary fiscal measures.
• The damage caused by the natural disasters appears to be more profound than most analysts had originally expected. The cost of rebuilding and the loss of output will therefore be greater than initial assumptions suggested.
• The latest Tankan survey (a survey of corporate sentiment, carried out by the central bank) shows that the disasters have damaged business confidence.