After its series of disasters Japan was expected to provide a shot of growth for the global economy as it was re-built. But the rebuilding effort is not pushing ahead with strength. One unexpected outcome has been the European debt crisis on the heels of Japan’s natural disasters. This has raised the perception of risk in the world slowed global growth, contributing to an environment in which the yen has moved up strongly. This move in the yen has undercut the rebuilding effort in Japan.

Of course, yen-strength has no impact on disaster relief but this new twist in the form of unexpected yen strength has a number of Japanese firms wondering if they want to rebuild in Japan at all if the yen is going to remain so strong. The government has even started to offer construction incentives for firms that would build factories in Japan.

Still the construction sector has not had much of any rebound from the lows it hit earlier this year. Construction has been locked in long secular decline.

Japan’s manufacturing sector has sprung back after the disasters and so has services. But in each case the rebound leaves the activity measure below its respective pre-crisis peak. Moreover, the rebound seems to have gone flat and lost its momentum, undoubtedly with the strength in the yen having become a factor.

As a result the outlook for Japan is once again clouded. Japan’s exports have disappointed. Japan needs some export led growth like never before. There is, of course, a certain measure of domestic rebuilding that will kick into gear regardless, but Japan is now a struggling economy with a large burden of domestic rebuilding and a huge national debt at a time that there is a lot of concern about debt to GDP ratios. There is also a slowing in international demand, a blow to an economy that is still export-dependent.

Japan has its work cut out for it. Europe is floundering. The UK is losing its affinity for austerity as its economy is stuck in a quagmire. The US economy is slowing and the IMF is warning Europe to do more to get its act together. All in all it is a picture of troubled international economy where local economies while joined at the hip through trade and capital flows seem to have conjured up unique local problems that will keep them very busy and keep risk levels elevated for some time yet.