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Impact of the Earthquake on the Japanese and Global Economies

Rajaram Panda was Senior Fellow at the Institute for Defence Studies and Analyses, New Delhi. Click here for profile
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  • March 18, 2011

    While it is too early to assess the exact impact of the disastrous earthquake, it is a no-brainer that the loss to Japan is likely to be quite significant and the impact on the global economy comparatively less severe. Though Japan did get back to work quickly to keep the economy running, the markets were certainly shaky and the Nikkei Stock Index dropped below the 10,000 mark. The earthquake came at a particularly bad time when Japan was struggling to pull out of a prolonged period of economic stagnation and was beginning to forget the two “Lost Decades”. Japan’s national character has, however, played its role and stocks surged more than 6 per cent on the third day of trading, in the process erasing half of the previous day’s loss. But the Nikkei continues to remain under the 10,000 mark. The upsurge was based on the assumption that the multiple crises on the nuclear front will not significantly worsen. However, there has been a dramatic turnaround for the worse on this front, with explosions occurring in more reactors of the Fukushima nuclear power plant.

    The Bank of Japan intervened and flooded money markets with emergency funding to the tune of nearly $700 billion in a bid to keep the financial wheels turning. After two days of steady fall by 20 per cent, the lowest in almost two years, the Index bounced back after the central bank injected liquidity worth 55.6 trillion yen ($688.3 billion), thus enabling banks to continue lending and meet the surging demand for post-disaster funds. Though the exact scale of the losses due to the disaster are difficult to estimate at this early point, Kyohei Morita, chief economist at Barclays Capital Japan, estimates the losses at about 15 trillion yen ($186 billion). This figure is greater than the 12.5 trillion yen loss caused by the 1995 Great Hanshin earthquake.

    With infrastructure for economic activity such as electricity generation, transportation and manufacturing completely lost, it is unclear how long the current ‘emergency’ situation will last. Damage to oil refineries is disrupting the already tight supply of gasoline. As a result, commodity distribution to supermarkets has been disrupted.

    The Prefectures affected the most are Iwate, Miyagi, Fukushima and Ibaraki, which represent about 7 per cent of Japan’s economy. The region is home to steel plants, oil refineries, nuclear power plants and factories manufacturing parts for cars and electronic goods. Economic activity in all these areas stand crippled because of the disruption in transport networks and power supplies. Many companies have shut down their factories indefinitely. Due to the unavailability of auto parts, Toyota Motor Corp. and Honda Motor Co. have closed all their domestic factories. Sony Corp. has also closed six factories in the Tohoku regions for similar reasons. The brewery industry also has been affected. Four beer tanks of Kirin Holdings Co. collapsed at its Sendai factory while its factory in Toride in Ibaraki Ken has been closed. Sapporo Holdings Ltd., another top brewer, has said that land at its factory in Chiba Ken subsided due to liquefaction. Similarly, Tokyo Disneyland remains closed.

    Toshiba Corp. suspended operations at its plant in Fukaya, Saitama Ken, thus affecting the production of flat-screen television sets. Mitsubishi Electric Corp.’s space satellite plant in Kamakura, Kanagawa Ken, has been shut. Renesas Electronics Corp. halted operations at seven factories in the Tohoku and Kanto regions. Ten plants of Fujitsu Ltd., a maker of semiconductors and computer equipment, were closed in northern Japan and the greater Tokyo region. Several departmental stores such as Mitsukoshi, Odakyu, Sogo and Seibu have closed their outlets. Japan Airlines Corp., the nation’s biggest carrier, has either cancelled or rescheduled a number of domestic and international flights.

    Private institutions have joined in the gigantic task of alleviating the impact on customers and consumers. Even individuals have come forward to contribute in their own modest ways to get the country’s economy back on its feet. For example, an elderly woman in the Kansai region made a contribution of 10 million yen to help the needy at this difficult time. The kind of energy that Japan has been displaying during the last week is likely to make sure that pessimism does not dominate analysis of the country’s economic future.

    Notwithstanding the brave national character in display, the immediate impact on Japan’s economy is pretty bad. As Japan Business Federation (Nippon Keidanren) Chairman Hiromasa Yonekura admitted after the earthquake, the “disaster will produce enormous losses” and that “a huge economic impact” of the quake and the tsunami is “unavoidable”. He urged that “companies make every effort to avoid as much of the effect as possible.”

    In any such crisis situation, it often happens that companies and consumers tend to look for short-term profits first, which, in the long term, only expands overall losses. Companies tend to hoard essential goods to make quick profits and individuals tend to buy up stocks of daily necessities. Both these factors cut into supplies for those who urgently need them, as is the case of people in the quake-affected region. Fearing that future supplies could be contaminated by radiation, people have started emptying supermarket shelves of food and other necessities. Therefore, without sound management of the crisis situation, the economic situation will only worsen. Japan is attempting to avoid this possibility. Yonekura has urged the government to establish a strong command centre to ensure swift relief and recovery. At this hour of handling the national calamity, both the ruling and opposition parties need to work together to implement appropriate and swift measures.

    Help both from inside and outside Japan has poured in. The scale of aid to the stricken areas seems enough to bail out Japan from the current distress. Telecommunication companies are providing free service to victims. Manufacturers like Sony have come forward to provide money as well as 30,000 radios needed to keep the victims updated with news. The cosmetic giant Shiseido is supplying shampoo that does not require water to use, apart from giving money. There is also a national effort to conserve energy by focusing more on the use of solar energy. These small measures with their far-reaching impact will help the manufacturing sector get back on its feet quickly.

    These private efforts are being adequately backed by government intervention to ensure that a steady stream of credit keeps flowing. As an external-oriented economy, Japan’s economic foundation is always determined by constant cooperation between companies, workers and consumers and a sound national economic policy. Japan has weathered many national crises due to its national character and this time too it is likely to be no different. Japanese firms are confident of making profits from business activities abroad, especially in the emerging economies. The yen has remained strong instead of falling in value since it is regarded as a stable currency. What Japan needs to do is conduct itself prudently in deciding how it will raise the necessary funds for reconstruction from bonds and other sources.

    Impact on the world

    Japan’s disaster is an added worry for the global economy which is just about beginning to recover from the downturn of the last two years. However, the damage to the US and world economies is expected to be relatively moderate and short-lived. Oil prices have already fallen below $100 a barrel mark because of expectations that the damage caused by the quake will slow Japan’s economy and reduce its demand for energy. A weaker Japanese economy can help ease global commodity prices since imports of fuel, agricultural products and other raw materials will fall. However, in view of the prolonged recession in Japan for quite some time, “the impact of much lower Japanese growth on the world economy will be probably limited and small,” according to Nariman Behravesh, chief economist at HIS Global Insight.

    As compared to the 1995 Great Hanshin quake, rebuilding this time may take longer. As autos and auto parts constitute more than one-third of US imports from Japan, shutting down of auto factories in Japan this time could disrupt production at US plants owned by Japanese automakers. The US auto parts makers could probably benefit if Japanese plants substitute US parts for those they usually get from Japan.

    The quake’s impact on India-Japan economic ties may also be adverse, since investments and ODA loans earmarked for some Indian projects may be revisited. The third phase of the expansion of the Delhi Metro with JICA money is likely to be delayed. The same is the case for early-bird projects across the Delhi Mumbai Industrial Corridor for which Japanese firms have made commitments.

    Japan’s biggest wild card is the fate of the damaged nuclear reactors in Fukushima. For the first time in Tokyo Electric Power Co.’s history, power distribution has been disrupted and is being rationed. Fukushima Dai-ichi plant, the centre of concern, has let off a burst of radiation and Japan so far has been unable to control the spread of radiation, increasing unease in Japan and in neighbouring countries. Large numbers of foreign nationals have started leaving Japan due to fears about radiation exposure, which is also likely to adversely impact on Japan’s economy.