A Complete Guide To Japan's $200 Billion Disaster And How It Will Affect The Global Economy

japan tsunami

Photo: ap

Since the earthquake in Japan last week, there’s been slew of reports detailing exactly what the repercussions of the disaster will be for the country’s economy.Markets, instead of relying on the more reserved projections of these reports, have been following the headlines out of Japan on the developing situation at Fukushima. That’s created a tremendous amount of volatility, evidenced by yesterday’s wild trading day in the U.S.

But what’s the real impact of the disaster on the Japanese economy? From everything we read, in two words: not catastrophic.

How the situation at Fukushima plays out will have a huge impact on certain parts of the economy, so it is worth monitoring. But here’s what we know right now.

When earthquakes hit, production drops, then demand rises for rebuild

Japan's most recent earthquake had a strong impact on domestic consumption

The Kobe quake crushed exports, more than imports

But that quake did not hurt Japanese trade for very long

If we follow the Kobe trend, we'll see a GDP decline in the short-term, then a bounce back

Since Kobe, Japan's trade role in Asia has diminished

Australia remains a key exporter of goods to Japan, and should benefit from the need for supplies for rebuilding

The stronger yen will allow Japan to import more raw goods to rebuild from Australia, etc. al.

Note: The Bank of Japan may yet intervene to decrease the value of the yen to boost Japan's export sector.

Auto Industry: Production switched off

Japan's automobile sector has been forced to shut down production, with resumption expected next week.

Nissan, Toyota, and Honda are all being hit with profit losses, losing as much as $24.7 million a day.

The loss in production could become worse if the electricity problem persists. That would hit the global supply chain, which may hurt auto firms from both Japan and abroad.

Tech: Supply chain problems

Big Japanese names like Hitachi and Sony are at the centre of the storm, but this crisis could spread to firms like Apple.

From Citi:

We believe Apple could be the most challenged out of all the companies in our hardware universe. Apple derives roughly 8% of the total op income from Japan, but more importantly, the already tight supply of iPhone and iPad could get much worse given potential shortages of BT and custom connectors. Meanwhile, we are constructive on HPQ shares given that the company faces minimal risk from Japan (2% of revs). We also recommend EMC and XRX on the recent pull-back for similar reasons.

Nuclear Power: Global demand under threat

The global nuclear industry is now under threat from the situation in Fukushima, where a meltdown is still possible.

Already, the German government has closed seven plants for three months. The Chinese have put their plans to build new plants on hold. Companies associated with the industry, like GE, are likely to face problems.

Entergy and SCANA have both been downgraded on nuclear political concerns.

Insurers: Exposed to both the destruction and physical claims

Many reinsurance firms, like PartnerRE, EverestRE, and RenaissanceRe have exposures to the country.

Notably, Aflac has 80% of its earnings exposed to the Japanese market.

Total Cost Of Current Disaster

Barclays projects the total costs of the earthquake will amount to 12-17 trillion yen ($152-217 billion).

Their calculations:

  • Building damages = reconstruction costs = JPY5-10trn (1.0-2.0% of GDP)
  • Expected losses to GDP = JPY2trn (private consumption) + JPY150bn (exports) -- JPY217bn (imports) + JPY5trn (manufacturing output) + JPY0.3trn (electric power industry output) = JPY7trn (1.4% of GDP)
  • Total economic cost = JPY12-17trn (2.4-3.4% of GDP)

And the GDP impact:

With reference to the patterns following the Great Hanshin-Awaji Earthquake of 1995 and other factors, we revised our real GDP forecasts (q/q saar) as follows: Apr-Jun (to +0.8% from +3.2%), Jul-Sep (to +3.2% from +2.4%) and Oct-Dec (to +3.0% from +1.9%). In fiscal year terms, we lowered our forecast to +1.7% from +2.0% for FY 11 and left our forecast at +1.8% for FY 12. In calendar year terms, we lowered to 1.6% for CY 11 and left our forecast at 1.9% for FY 12.

Worst Case Scenario: Fukushima disaster

If the Fukushima plant were to experience a meltdown and explosion the UK government's chief scientific officer John Beddington says damages would be limited to a 30 KM range. That means major areas like Tokyo would be completely spared in his worst case scenario.

Based on that projection, Societe Generale have made a rough GDP call:

In terms of GDP, Fukushima prefecture accounts for 1.5% of Japan's GDP. The prefecture is responsible for 2.5% of agriculture/fishery and 2.0% of manufacturing. Among manufacturing, electrical machinery (3.4%) and precision machinery (5.1%) have relatively bigger shares of their respective industries' national output.

Thus in the worst case, 20% of production capacity of Fukushima prefecture can be said to be lost, that's 1.5% *0.2 = 0.3%.

Now for a look at the devastation...

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