The Impact Of Japan's Earthquake On The Economy

Updated on 14 March 2011

Days after the earthquake, the true extend of damages to the country is finally revealed.

The impact on the Japanese economy will probably be worse than my initial assessment.  There will be some disruptions on manufacturing productions and many other services (FT Alphaville has a nice compilation of how Japanese companies are doing after the quake), and transportation has been hugely disrupted for the moment, and some ports have also been damaged according to some reports I heard here and there, so companies may have trouble getting their products out even their productions are not halted. 

Now the more worrying sign comes from power outage and the country to dealing with their nuclear crisis.  Power Outage has been scheduled to reduce the energy load as nuclear plants are closed or in crises of meltdown.  For a country with very natural resources (e.g. oil, coal, etc) and rely extensively on nuclear power, whether the power supply can be restored quickly will be a significant factor to determine when industrial activities can be resumed. 

Widespread damages to infrastructure and capital stocks will also hinder economic growth in the short-term.  The good news though is that it will require massive investments in infrastructure and capital stocks, which will stimulate the economy as the country rebuild itself from the ruin.  But there’s a serious problem: The Japanese government is already hugely in debt.  Disaster in such scale means that the government will have to invest significant amount of money to rebuild what have been damaged.  While it is too early to tell the amount of money required to rebuild, there is no question that the number will be huge.  Thus such a disaster striking at this moment certainly does not bode well for the government as far as public finances are concerned.

Will this disaster pose a significant risk to the global economy?  I thought previously that the impact would be minimal, but it is harder to assess now as the damages have been worse than prebiously thought, and Japan is still the third largest economy in the world.  A quick check on China’s latest export figure reminds us that Japan is the third largest importer of China’s goods after European Union and the United States.  I

n February, 8% of the Chinese exports went to Japan.  In the short-term, the near-shutdown of Japan’s economy will probably make a significant impact of China’s trade balances in the months to come.  While it doesn’t bode very well for China, I start to suspect that the tightening stance of the government may be soften if the negative impact on export is more sustained than thought.

 

Read More:

FT Alphaville has this interesting piece on insurance in the ring of fire

This article was updated extensively on 14 March 2011 after more information has been available for better assessment. I previously suggested that the earthquake will only have a short-term impact on the economy, but as the extend of damages revealed days after the earthquake have been much worse than expected, the negative impact on Japanese economy will probably be longer than a one or two-quarter plunge in GDP, and I now believe that the global economy will feel the impact of the earthquake.

Note: I am sure readers would like to join me and send the deepest condolences to families and friends of those who lost their lives in the 8.9-magnitude earthquake in Japan. Thoughts shall be with the people who are affected by the earthquake and the associated tsunami.

This article originally appeared here: The Impact Of Japan’s Earthquake On The Economy
Also sprach Analyst – World & China Economy, Global Finance, Real Estate

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