Japan’s Pain & Suffering Will Have Global Consequences

The week ahead will bring fresh news on a number of key economic fronts for the U.S., including housing starts and consumer price inflation. But the numbers may be irrelevant before they’re published as the tragedy in Japan alters perceptions and economic activity. The global economy was already under a shadow in the wake of the Middle East turmoil due to the resulting jump in oil prices. That threat appears to have eased a bit, although it’s premature to dismiss this factor in the weeks and months ahead. Meantime, there’s Japan to consider, starting with the huge scale of human suffering. In economic terms, the first hurdle is dealing with lots of new uncertainty that’s arrived in the wake of the tragedy. Dated economic news in the period ahead is likely to be of limited value for assessing the trend.

“It is too soon to develop good estimates of the likely economic and financial effects of last Friday’s massive earthquake and subsequent devastating tsunami, particularly with the situation in the damaged nuclear plants still unresolved,” advises Bill Witherell, chief economist at Cumberland Advisors, in a note to clients today. The next-best thing, he suggests, is looking for perspective by reviewing the aftermath of the Kobe earthquake that hit Japan in January 1995. Witherell continues:

It has often been the case that the effect of a natural disaster on a nation’s economic growth turns out to be less than initially expected. In 1995, the Japanese economy had considerable spare capacity that could be used to offset the reduced production from the area affected by the quake. That situation is also present today in Japan. While the Japanese economy expanded at a 3.9% clip last year, better than many other advanced economies, it remains well below full-capacity production levels.

Reports that the Bank of Japan is prepared to inject huge amounts of fresh liquidity into the country’s economy may help too. But for the moment, at least, Witherell and other economists warn that there’s still too much uncertainty to be confident about what happens next, either for Japan or the global economy. Indeed, Japan was hit by two catastrophes over the week: a tsunami and the ongoing nuclear power crisis that’s leaking small amounts of radiation into the atmosphere. It’s hard to overemphasize that there’s a continuing health risk of unknown magnitude for Japan, and perhaps other countries as well.

Whatever happens, the main risks obviously cut deeply for Japan. “In the short term, the market will almost surely suffer and stocks will plunge,” says Koetsu Aizawa, economics professor at Saitama University in Japan. “People might see an already weakened Japan, overshadowed by a growing China, getting dealt the house-finishing blow from this quake.”

No wonder, then, that the Bank of Japan is wasting no time in mustering its monetary forces. It’s unclear how much this will help, but there’s little reason not to try. The country’s central bank today launched what’s reportedly its most-ambitious liquidity injections to date.

History suggests that even large disasters in big industrialized economies tend to be slight when measured in GDP over several years. But this time might be different for Japan, opines Peter Morici, an economics professor at the University of Maryland School and former chief economist at the U.S. International Trade Commission:

Japan has encountered two disasters—the tsunami and earthquake, and the explosions at nuclear plants, and globalization may make Japan more vulnerable rather than in the past.

The double whammy has the potential to keep the Japanese economy shut down longer and globalization offers Japan’s export customers alternatives they might not have enjoyed a decade or two ago. Hyundai and Ford now are good substitutes for Toyota’s cars, and even more so, Caterpillar tractors made in China can replace Komatsu’s land movers.

The pause and uncertainty effected by the nuclear shutdowns will cause production to rev up more outside Japan and take longer to return to full capacity inside the country. Longer term, the nuclear disaster will accelerate the implosion of Japan’s economy caused by an aging population, just as Hurricane Katrina caused people and activities to permanently leave more economically depressed areas of the Gulf region permanently for faster-growing places in the U.S.

Japan is the world’s third-largest economy after the U.S. and China, and so it’s a safe bet that there will after-shocks for the world economy. But as Morici suggests, Japan’s pain may provide new opportunities elsewhere, distressing as it is to even discuss such matters with so much pain still fresh and ongoing. In any case, “the fallout of the earthquake could extend beyond Japan as production cycles are affect[ed] across Asia, Briggs, U.S. interest rate strategist at RBS Securities, tells The Wall Street Journal. “And Asia has been an engine of growth in the global economy.”

The only sure thing is that the huge toll in human misery and the massive expenses that are coming for cleaning up and rebuilding are likely to rise. Meantime, there are lots of unanswered questions about how Japan’s tragedy ripples out into the wider world. The stakes are certainly high. As Mohamed El-Erian, chief executive of bond manager Pimco, writes in today’s FT: “The world has a shared interest in the economic recovery of this systemically important country. The good health of Japan is central to a robust global economy that generates lots of jobs and enhances productivity. And, at the most basic human level, we wish for the well-being of all those in Japan who have been affected by a truly horrible tragedy.”

About James Picerno 894 Articles

James Picerno is a financial journalist who has been writing about finance and investment theory for more than twenty years. He writes for trade magazines read by financial professionals and financial advisers.

Over the years, he’s written for the Wall Street Journal, Barron’s, Bloomberg, Dow Jones, Reuters.

Visit: The Capital Spectator

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