Japan disaster another worry for global economy
Erika Kinetz
Japan’s earthquake and nuclear crisis have put pressure on the
already fragile global economy, squeezed supplies of goods from computer
chips to auto parts and raised fears of higher interest rates.
The disaster frightened financial markets in Tokyo and on Wall Street
on Tuesday. Japan’s Nikkei average lost 10 percent, and the Dow Jones
industrials fell so quickly after the opening bell that the stock
exchange invoked a special rule to reduce volatility.
Survivors return to their devastated houses next to Miyako port,
northeastern Japan on March 17. Residents living at the affected
area which was destroyed by the March 11 earthquake and tsunami,
return to salvage their belongings. AFP |
Yet the damage to the US and world economies is expected to be
relatively moderate and short-lived. Oil prices are falling, helping
drivers around the world. And the reconstruction expected along Japan’s
northeastern coast could even provide a jolt of economic growth.
A weaker Japanese economy could help ease global commodity prices
because Japan is a major importer of fuel, agricultural products and
other raw materials, notes Mark Zandi, chief economist at Moody’s
Analytics. Oil prices fell more than $ 4 to $ 97.18 a barrel Tuesday
because of expectations that quake damage will slow Japan’s economy and
reduce its demand for energy.
Even “assuming a drastic scenario,” Bank of America economist Ethan
Harris estimates, the disaster would shave just 0.1 percentage point off
global economic growth — to 4.2 percent this year.
“Japan has not been an engine of global or Asian growth for some
time,” says Nariman Behravesh, chief economist at IHS Global Insight.
“This means that the impact of much lower Japanese growth on the
world economy will be probably limited and small.” Japan is only half as
important to the world’s economy as it was during its last major
disaster, the 1995 Kobe earthquake.
And the area hit hardest by Friday’s quake accounts only about half
as much economic output as the area damaged by the Kobe quake, the
Organization for Economic Cooperation and Development estimates.
Japan proved resilient after the Kobe quake: Manufacturers returned
to normal production levels within 15 months, according to the CLSA.
Four in every five shops were back open in a year and a half. All told,
Japan’s comeback defied dire warnings that it would take a decade to
rebuild.
Autos and auto parts make up more than one-third of U.S. imports from
Japan. As a result, shutdowns of Japanese auto factories could disrupt
production at U.S. plants owned by Japanese automakers.
At the same time, some U.S. auto parts makers could benefit if
Japanese plants in the United States substitute U.S. parts for those
they usually get from Japan, Behravesh says.
Survivors search through the remnants of their house next to
Miyako port, northeastern Japan on March 17. Residents living at
the affected area which was destroyed by the March 11 earthquake
and tsunami, return to salvage their belongings. AFP |
A big wild card is the fate of Japan’s damaged nuclear power plants.
The Fukushima Dai-ichi plant, the center of the concern, let off a burst
of radiation on Tuesday. Radiation levels in the surrounding area
subsided by evening, but unease in Japan did not.
“If the nuclear crisis turns into a full-blown catastrophe, then the
negative effect on growth this year will be much larger,” IHS’ Behravesh
says.
Another unknown is the impact of the disruptions to Japan’s power
supplies. Behravesh estimates about 10 percent of Japan’s electricity
generation could be off line for several months. If so, that would
disrupt steel, auto and other production.
Investors fear that Japan will struggle to finance reconstruction,
which is expected to cost the government at least $ 200 billion. The
Japanese government’s debt is already an alarming 225 percent of the
country’s economic output.
Some worry that Japan will sell some of its vast holdings of US
government debt to raise money. Doing so would push the prices of U.S.
Treasury bonds down and yields up, raising U.S. interest rates.
But Treasury Secretary Timothy Geithner on Tuesday dismissed the
fears of a Japanese fire sale of Treasury debt.
“Japan is a very rich country and has a high savings rate,” he said.
It “has the capacity to deal not just with the humanitarian challenge
but also the reconstruction challenge they face ahead.” What’s more, the
Bank of Japan has been buying Treasurys and other assets as it pumps
money into the financial system to restore calm.
For now, though, the latest quake, the resulting tsunami and the
threat of contamination from a damaged nuclear plant have spooked
financial markets. Investors are fretting about the effects on companies
around the world. Japan, the world’s third-largest economy, accounts for
about 10 percent of U.S. exports. The Dow Jones industrials rebounded
after starting the day down almost 300 points. They closed down 137
points, or more than 1 percent. The futures markets, which can indicate
whether stocks will rise and fall, looked so pessimistic before the
opening bell on Wall Street that the stock exchange invoked a special
rule designed to ease volatility.
Stocks plunged 5 percent in Germany and 4 percent in France. And in
Japan, the benchmark Nikkei average lost more than 10 percent of its
value in a matter of hours.
The quake damaged roads, ports, airports and factories in Japan,
disrupting the shipment of goods in and out. The disaster blindsided
multinational companies that were bracing for trouble in their
transportation lines on the other side of the world — at the Suez Canal
or elsewhere in the Middle East where protests are destabilizing
countries from Bahrain to Libya, says Patrick Burnson, executive editor
of Supply Chain Management Review.
It’s shut down auto and auto parts factories. Analysts at Tong Yang
Securities in South Korea “do not expect production to normalize any
time soon” in Japan. Even plants that stay open may have to wait for
parts to arrive, a problem made worse because so many factories follow
just-in-time supply management and keep few parts on hand.
Car plants in Thailand could have a harder time getting steel, much
of which is imported from Japan.
Japan is a major supplier of NAND flash memory chips, commonly used
in portable electronics. Japan-based Toshiba Corp., a big maker of the
chips, was among the technology companies that temporarily closed
facilities.
Prices for the chips jumped 10 percent from before the earthquake to
Monday and another 3 percent Tuesday, according to Jim Handy, a director
at Objective Analysis and an expert on the electronics and semiconductor
industries.
The “wafers” that are key building blocks of computer chips are also
commonly made in Japan. A shortage could pinch big buyers such as Intel
Corp., the world’s biggest semiconductor company, and Texas Instruments
Inc. — though one firm, Barclays Capital, believes Texas Instruments has
enough in stock to get by. Supplies are lean, though, of capacitors and
other electronics used in cellphones, which are also often made in
Japan. Nokia Corp. relies heavily on Japan for those electronics.
Chinese companies are bracing themselves for losses and delays from
disruptions in shipments of high-end electronics and auto components
from Japan and some are looking for import replacements from South Korea
or Taiwan, according to the International Business Daily, the official
paper of China’s Commerce Ministry.
Some analysts note that companies and consumers that now buy Japanese
products can often find alternatives made elsewhere. “What is made in
Japan now has lots of competitive alternatives that didn’t exist 25
years ago,” says Peter Morici, a professor at the University of Maryland
and a former director at the U.S. International Trade Commission. “If
there aren’t as many Camrys in the country this year as there might have
been, you might have a couple hundred thousand additional Ford
customers.
If those people have good experiences with those cars, it could
change buying patterns for life.” David Rea, an economist with Capital
Economics in London, said, “You’ll have Japan’s competitors — largely
South Korea and Taiwan who are in high end manufacturing, and China as
well — come in and undercut Japanese businesses experiencing disruption
from the earthquake.” If Japan’s infrastructure doesn’t get rebuilt
quickly enough, Japanese companies may transfer production overseas to
pick up the slack, Rea added.
The reconstruction of Japan’s northeastern coast might also provide
business opportunities for foreign countries. Malaysian timber, for
instance, will likely be needed to rebuild homes and other buildings.
IHS predicts that the quake will “ultimately boost” U.S. exports to
Japan.
(Bloomberg Businessweek) |