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Japanese recovery in question as yen rises in value

Despite signs of post-tsunami growth, the Japanese economy may still be in danger.

Analysts have warned that the Japanese economy may struggle in coming months due to a combination of reduced manufacturing output and the increased cost of the yen.

Manufacturing suffered in the wake of the Tōhoku earthquake and tsunami, which devastated Japan in March 2011. Supply lines and infrastructure were disturbed, and the meltdown at the Fukushima nuclear power station caused energy shortages, leading to temporary factory closures. The resulting decline in economic output prompted the International Monetary Fund (IMF) to downgrade its forecast for growth of the Japanese economy in April from 1.6 per cent to 1.4 per cent.

Despite moderate recovery in the retail and manufacturing sector in July, analysts are concerned that the rising cost of the yen could damage the competitiveness of Japanese exports.

At a time of uncertainty for the US and eurozone economies, investors are increasingly looking towards the yen and gold, considered safer investments, leading to a spike in the value of the yen. The yen has risen up to 12 per cent against the US dollar over the past year.

Consumers in Europe and the US may look elsewhere for cheaper imports if the yen remains high. Combined with lower demand globally, this could augur badly for the Japanese economy, which largely relies on its export sector.