By Marcus Leach
Business Monitor International has released a new special report which
covers the probable economic and market implications of the Japan earthquake to the world economy.
Since the devastating Tohoku earthquake in Japan on March 11 and its
terrible aftermath, there has been much speculation on the scale and scope
of a potential nuclear disaster and the implications the disaster will have
on the world financial markets. The special report seeks to provide some
insight into some of the main economic repercussions ranging from the
disruption to Japanese economic growth and markets through to the impact on commodity prices and the infrastructure sector.
Currently at least 6,000 people are known to have died and many thousands
are still missing, with local authorities reporting that the final toll
could exceed 10,000, which would be greater than the 6,400 killed in the
Kobe (Hanshin) quake of 1995. However, while the human toll is disastrous,
the infrastructure analysis provides the relatively positive news, if there
is any, that Japan is better placed than many other disaster prone countries
to respond to the crisis and Japan’s social cohesion should help it
withstand a disaster of this magnitude better than many other countries. The
participation of China and South Korea in the rescue efforts could also
boost the previously strained relations between Japan and its neighbours.
Figures in the report show that there will be severe disruption to economic
activity and that recession risks have returned to the fore, although at
this stage the full impact is difficult to estimate. This comes at a time
when it looked like export growth would boost overall GDP in 2011 following
a 1.2% annualised contraction in Q410. While Tohoku is not a major economic
centre, it still accounts for 8% of GDP and has numerous factories.
Meanwhile, power outages across large parts of Japan, including Greater
Tokyo, and supply chain concerns mean that major exporting companies such as Sony and Toyota have halted some operations indefinitely. Assuming that net exports place a sizeable drag on headline growth as exports cool and capital imports surge (as following the Hanshin earthquake in 1995), Japan may continue to suffer negative sequential growth in H111.
Other insights from the Japan analysis indicate that the Japanese
government will need to spend heavily to rebuild the damage in the Tohoku
region, around the city of Sendai, which will generate economic activity,
but the costs will worsen Japan’s already dire fiscal deficit and debt
burdens, and could put gross government debt through the JPY1,000trn level
this year (an estimated 204% of GDP). Additionally, while markets will
remain volatile in the short term, indications are that the authorities’
response to the crisis means that the medium-term view of a weaker yen (to
JPY85.00/US$ in the first instance) remains on track, and the longer-term
view of an eventual fiscal crisis is reinforced.
Other major areas looked at by the report include the risks for oil & gas
prices, shipping, agriculture, automotive manufacture and the base metals
industry, as well as important regional economic outlooks.