Japan Disaster to Hit Global and Japanese Economy

Osaka - Wednesday, March 23, 2011




Stock market immediately reacted to the disaster that hit Japan on March 11. Japan’s Nikkei 225 index fell 6.4% extending a 6.2% loss on Monday, March 14 when the S&P 500 fell only 0.6%.



Following series of articles on the Japan Disaster, the latest one being How the World and Japan Should Handle Japan Disaster, the author would like to briefly explain the effect of the Japan disaster on economy, global and Japan, summarizing estimation and viewpoint reported by global and Japanese media.



The author feels it would give an idea of the size of the disaster in the long term affecting macro economy, and the urgency of the aid and recovery/reconstruction to minimize the negative effect on economy, global as well as Japan.



1. What is the possible effect on the Japanese economy?



Most media agree that the loss from the disaster is much larger than the Kobe earthquake in 1995, which was 1 billion yen. What makes the loss far larger than Kobe is the fact that the disaster completely destroyed lifeline and social infrastructure. For this reason, all media agree that the rebuild would require at least 5 years, which was what Kobe post-earthquake rebuilt required.



1) “Direct” loss



The estimations reported by most media of the “direct” loss from the disaster of the earthquake and the tsunami of the Tohoku region (north eastern Japan that the earthquake and tsunami hit hard on March 11) would fall in the range of 1.5 to 2.5 trillion yen. 2.5 trillion yen is equivalent to 4% of the economic output of the country in 2010, according to the World Bank.



Professor Sato of Hitotsubashi University estimated with 2 scenarios, one of 2.5 billion yen loss and another of 3.5 trillion yen loss. Loss of 2.5 trillion yen is only of Kanto area, and 3.5 trillion yen loss includes loss of other areas/prefectures severely been effected by the earthquake. Such prefectures include Shizuoka, Aichi, Mie, Wakayama and Kochi.



2）“Indirect” loss



This estimation mentioned above is called “direct” loss because it does not include “indirect” loss of the disaster. Possible indirect losses include the following. Such “indirect” losses are extremely difficult to estimate but would be huge, and it is quite likely that this would enlarge fiscal strain on Japan, when the ratio of debt to GDP already is 200%, compared to 90% in the U.S. according to Oliver.



(1) Loss from destruction of social infrastructure



This includes roads, electricity and water supply.



(2) Broken link of supply chain network among companies



This includes everything related to economic activities of companies such as purchasing/procurement, energy and water supply, distribution channel to supply products to the market.



This is to severely affect western Japan as well. Today on March 23 JR West announced that it will drastically reduce trains on service from April because they cannot obtain components necessary in maintenance. Such components are made in plants in Tohoku area (Fukushima) and the plants are unable to operate.



(3) Loss from the Fukushima nuclear plant issue



This includes many possible losses such as the following.



(i) People evacuating from (east) Japan meaning negative effect on tourism, and many events being cancelled meaning negative effect on consumer spending..



(ii) Contamination making agriculture and fishery products unsuitable to ship and consume. This would likely to have direct impact on domestic food supply as well as international trade. This means loss of agriculture and fishery businesses and some business owners may well be forced to go bankrupt. The bad reputation could further enlarge loss.



(4) Electricity shortage



This is not only in Kanto region. In fact, this is a serious issue already in Kanto (e.g. Tokyo, Kanagawa/Yokoyama, Chiba, Saitama) leading to “planned” blackout. This is an enormous negative factor for business in all industry



2. What is the possible effect on global economy?




There seem to be different perspectives on the effect on global economy. There are some people such as Oliver, although agree that the loss from the disaster is huge on Japan, say that global economy should not be hardly hit by the Japan disaster because the GDP of Japan in the world economy is limited.



However, others say that the Japan disaster could hit global economy hard. This is because there have been many core plants of automotives (e.g. of Japan big 3 automobile companies) and electronics including plants that have been manufacturing core components of mobile phones that such global companies as Nokia and Samsung has been relying on. It was soon reported in multiple western media that such global companies of consumer electronics are to be hit hard and although they will try to acquire components from other sources it would be extremely difficult for them to come up with good options.



The World Bank predicted in a separate report that East Asia would be affected. They say that in the immediate future the biggest impact will be in terms of trade and finance. The World Bank report also says that the other worrying factor for the region is that about one quarter of East Asia’s log-term debt is dominated in yen. For China it is about 8% but for Thailand it is about 60%. Thus the report points out that a 1% appreciation in the Japanese yen translated into about 250 million USD increase in annual debt servicing on the yen-dominated assts held by the nations.



3. The author’s final thoughts



The author feels there are other possible negative effects on global economy if Japan, with world class technology in many fields such as environment that the world requires today, struggles too much in reconstruction.



Japan has recovered from various disasters in its history, from many major earthquake (e.g. of Kanto in 1929, of Kobe in 1995) and from World War II and the author believes it can recover again, with the help from the international community as well as its citizens. This is probably another “test for toughness to survive”, as Fingleton says.



By overcoming what Koya says “resource crisis, demand crisis, and mind crisis” of the disaster, Japan needs to pass the test for toughness to survive, and transform the reconstruction to, what Rosembush words as “growth catalyst that Japan needed for decades”.





References:-

BBC News (March 21, 2011)

http://www.bbc.co.uk/news/business-12802193

CNNMoney.com staff (March 15, 2011) Tokyo stocks plummet as crisis deepens　CNNMoney.com staff http://money.cnn.com/2011/03/14/markets/japan_world_markets_tuesday/index.htm?section=money_topstories&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+rss%2Fmoney_topstories+%28Top+Stories%29&utm_content=Twitter

Fingleton, Eamonn (March 15, 2011) Broken Links - How much will the Japan quake hurt the global economy? http://www.tnr.com/article/85236/japan-earthquake-tsunami-industry-economy

Isidore, Chris (March 14, 2011) Will global economy be hit by Japan? http://money.cnn.com/2011/03/14/news/international/japan_earthquake_tsunami_economic_impact/index.htm

Koya, Tomoyuki (March 17, 2011) Three crisis that companies suffer from the disaster – resource crisis, demand crisis and mind crisis (in Japanese)

http://business.nikkeibp.co.jp/article/manage/20110316/219006/　

Los Angeles Time (March 15, 2011) Japan quake likely to affect business globally http://www.latimes.com/business/la-fi-japan-business-20110315,0,2713425.story?track=rss

Nikkei (March 23, 2011) Loss from the Japan earthquake to total 15-25 billion yen, more than the loss from Kobe earthquake that was 10 billion, according to the estimation of the Japanese government (in Japanese) http://www.nikkei.com/news/headline/article/g=96958A9C93819481E0E0E2E1838DE0E0E2E1E0E2E3E39F9FEAE2E2E2

Oliver, Shane (March 15, 2011) Global Economy should not be badly hit by Japan’s heartbreaking tsunami

http://www.smartcompany.com.au/economy/20110315-global-economy-should-not-be-badly-hit-by-japan-s-heartbreaking-tsunami-oliver.html

Rosenbush, Steve (March 15, 2011) How Japan Earthquake Will Impact Global Economy

http://www.institutionalinvestor.com/rss/Articles/2787087/How-Japan-Earthquake-Will-Impact-Global-Economy.html?p=1

Reuters (March 16, 2011) Japan’s rebuilding needs at least 5 years (in Japanese) http://jp.reuters.com/article/topNews/idJPJAPAN-20060120110316

Sakai, Koichi (March 18, 2011) In 10 years Japan to become an attractive country to invest in, according to a famous U.S. investor (in Japanese)

http://business.nikkeibp.co.jp/article/manage/20110317/219023/

Sato, Motohiro (March 15, 2011) Overview of economic loss from the Japan disaster (in Japanese)

http://diamond.jp/articles/-/11498

Takenaka, Heizo (March 16, 2011) Huge disaster when the economy was about to recover (in Japanese)

http://www.nikkei.com/biz/editorial/article/g=96958A9C93819499E3E6E2E2998DE3E6E2E1E0E2E3E3E2E2E2E2E2E2;p=9694E2E4E3E2E0E2E3E2EBE4E1E6