Aftershocks will shake Japan's economy
Apr 04, 2011
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Two weeks after Japan’s tsunami, over 11,000 people are known to have been killed and radiation is still leaking out of the Fukushima nuclear power plant. The Japanese government has said that the cost of repairing the damage to buildings and infrastructure would be ¥16trn to ¥25trn (the latter is around 5% of annual GDP). Analysts are still assessing the likely extent of the disruption to economic activity, while the knock-on effects on the global supply chain are becoming apparent. The yen has weakened to 83 to the US dollar, from its post-quake record of under 79.
What the commentators said
Many analysts have pencilled in a V-shaped rebound for the Japanese economy, as Wayne Arnold pointed out on Breakingviews.com. But are they being too optimistic? One worry is that power shortages will “create a lasting dent in Japanese output” and hamper the recovery. A fifth of the generating capacity of Tokyo Electric Power, the quake-affected region’s top utility, is out of service, said David Jolly in The New York Times. That’s around 11% of the country’s total power. It could take until next year to restore power completely. In the meantime, factory production and consumption will be hit by blackouts.
There’s also the impact on sentiment, said Capital Economics. Worries about contaminated food and “the sight of foreigners and nationals leaving the country must surely add to the drag on activity”. Data over the net few months could be “shockingly bad”, with GDP falling at an annualised rate of 4% in the second quarter before the rebound starts. Overall, GDP will be flat in 2011, reckons Capital Economics.
On the plus side, the yen has fallen back, and looks set to weaken further, giving a boost to the crucial export sector. Co-ordinated intervention, and the threat of more to come, has reversed the post-quake spike. Other major economies plan gradually to tighten monetary policy while the Japanese central bank is still printing money. That implies stronger currencies outside Japan. “We see the yen moving lower,” said Hans Redeker of BNP Paribas.
On a global scale, Japan’s slowdown will be transmitted through the global supply chain. As Capital Economics pointed out, 56% of Japanese exports last year were intermediate goods. The near-term effect on the electronics, chemical and automotive sectors “could be quite painful”, said Nariman Behravesh of IHS Global Insight. For instance, part shortages are spreading to Japanese car-makers’ US operations, and they are having to curb assembly operations. The world, said Andrew Dowell in The Wall Street Journal, has been reminded “just how much [it relies] on the island nation”.
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