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EIU_Japan's Economy after the Quake_March 23_11
 

EIU_Japan's Economy after the Quake_March 23_11

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Japan is still reeling from the effects of the massive earthquake and tsunami that devastated the north-east of the country on March 11th. The offshore earthquake, measuring 9.0 in magnitude, was one ...

Japan is still reeling from the effects of the massive earthquake and tsunami that devastated the north-east of the country on March 11th. The offshore earthquake, measuring 9.0 in magnitude, was one of the largest ever recorded. The tsunami flattened towns and villages, resulting in massive destruction of property and the displacement of hundreds of thousands of people. With thousands still unaccounted for, the death toll is likely to rise rapidly. The disaster has also damaged a nuclear-power plant, resulting in several explosions and prompting the evacuation of the surrounding population. So long as there is no nuclear catastrophe, the impact on national GDP growth is likely to be modest compared with the scale of human trauma. But what will be the main economic implications of the disaster? How will this event hamper business operations?

Read the EIU's economic outlook for Japan following the recent catastrophe. Includes three possible scenarios.

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  • The death toll relating to the twin natural disasters is likely to exceed 10,000, while the dislocation of people living in the damaged areas is hitting tens of thousands more. Industrial capacity has suffered through damage to facilities and through losses in output as a result of power and water outages. Much of this will remain a short term issue and the full impact on the economy will depend on whether or not companies are able to divert orders to other factories. But the short term impact on industrial output has certainly been worsened by power distribution and component supply issues. The loss of some coal power facilities as well as nuclear reactors could have a long term impact on power supplies, particularly as it is difficult to divert power supplies from the West to East of the country, reflecting in part a quirk in Japan, whereby different parts of the country use different megahertz frequencies.
  • Although the economic importance of the area hit by the 1995 Kobe earthquake was twice as high as the area hit this time, the disruption to output could prove greater for the reasons mentioned above, namely that there has been a big impact on industrial output and economic activity owing to the loss of power, water etc. The just-in-time systems at Japanese factories mean that supply shortages can occur quickly, while increasing specialisation in manufacturing means that it is possible that where facilities making specific parts are currently offline, the making of an entire product could be curtailed. The ability of the government to finance the reconstruction is worse than it was in 1995 owing to its relatively weaker financial position. But the authorities still have access to financing and the administrative skills to start building quickly. The impact of the natural disasters on world financial markets has been relatively limited. The unfolding nuclear crisis has had a bigger role in undermining confidence.
  • Our central forecast assumes that the loss of economic activity in the second quarter, combined with the fact that reconstruction is unlikely to take off significantly in that period, will result in a quarter-on-quarter contraction. However, in the second half of 2011 and into 2012 the economy will be given a boost as rebuilding starts. After Kobe private consumption remained healthy, and public investment and private investment in housing accelerated. This time public investment will again take place and housing will need to be rebuilt. But private consumption is likely to take longer to recover, in part owing to the uncertainty created by the nuclear issue. The net effect on our forecast is limited on an annual average basis, but this masks a significant change in our quarterly profile.
  • The loss of ports, supply chains and power will all undermine Japanese exporters in the coming weeks, but there is unlikely to be any long-term impact on export patterns. Japan plays unique role in many high-end manufacturing activities, and these cannot be readily taken over by other countries in Asia. The yen has come under upward pressure owing to a number of reasons, including a repatriation of funds by domestic investors and possibly short term players seeking returns amid the volatility. Whether this upward pressure will be sustained remains uncertain. Efforts by the G7 to weaken the yen are unlikely to work if markets about the true value of the currency. Commodity prices have also become more volatile. More will be known about the impact of the disaster on commodity markets once we know the extent of the damage to the power infrastructure. Certainly, in the short-term Japan will import more LNG, coal and oil in order to make up for the shortfall created by the loss of nuclear output. But the impact on global commodity markets will remain limited within a few months, particularly beyond the energy sector.
  • Regardless of the impact of the 2008-09 global and economic crisis and the current natural disasters, Japan’s economy has been laggard since its bubble burst in the 1980s. This has allowed other countries to catch up in terms of global economic weighting. Germany has grown at similar rates, but its growth has not been as dependent on government spending and has thus left it with a more sustainable economic growth structure.
  • This small impact will in part reflect the fact that Japan’s contribution to additional global demand for commodities has been steadily falling in recent years. As the chart above shows, its consumption of key materials is relatively limited. South Korea is a smaller economy and is not far behind in terms of demand. Put into context. We have left China off this chart as it is off the scale in these commodity categories.
  • All that we have discussed so far has been premised on a core assumption that the nuclear issue will resolve itself, but this is not yet guaranteed.
  • The assumption here is that the danger of a more serious nuclear accident dissipates in the next few days. So far, worries about radiation poisoning have triggered panic-buying of supplies, prolonged office closures and resulted in a growing exodus from Japan of expatriate workers. But most people have generally displayed a remarkable degree of calm. Although it will take time to restore and reintegrate the sections of the national power grid damaged by the earthquake and tsunami, economic activity in areas of Japan that did not sustain serious physical damage could return to normal fairly rapidly. In this event, our current forecast is unlikely to change significantly.
  • Next. The present state of elevated risk and uncertainty persists for some time. As yet unforeseen problems could surface in the other reactors. Aftershocks could inflict further damage. In this scenario, the broader economic impact would depend on how long the crisis simmers without getting markedly worse. With every passing day, the persistent possibility of a catastrophic radiation leak is further fraying the nerves of businessmen and consumers. There are also significant opportunity costs in terms of the broader relief and rebuilding effort owing to delays. This, in turn, would delay the reconstruction-driven uptick in the rate of economic growth that we currently expect to begin in the second half of 2011.
  • Lastly, the outlook would deteriorate dramatically in the worst-case scenario of a nuclear meltdown accompanied by widespread contamination. Increasingly dangerous radiation leaks or a permanent forced withdrawal from the facility of crisis-management personnel could, for example, trigger broader evacuations and create a sense of panic in the capital, Tokyo. The economic costs of the disaster would multiply accordingly.
  • Kil Dosanjh is a Senior Economist in the Economist Intelligence Unit's Asia team, where his portfolio currently includes forecasting political and economic developments in Japan, South Korea and Taiwan. He has also covered India and Pakistan. Kil is also a deputy director in the Economist Intelligence Unit's Country Risk Service, a role in which he leads the company's thinking on risks associated with politics, banking, currency and sovereign payments capacity, with a particular focus on North-east and South Asia. Kil regularly speaks at conferences and seminars and provides clients with in-depth analysis on a range of issues that may impact on their business operations. Before joining the Economist Intelligence Unit, he worked in Thailand, specialising in infrastructure development in the Mekong region. He holds a BSc in Economics and an MSc in Financial Economics.

EIU_Japan's Economy after the Quake_March 23_11 EIU_Japan's Economy after the Quake_March 23_11 Presentation Transcript

  • Japan’s economy after the quake Kilbinder Dosanjh Senior Analyst, Asia Economist Intelligence Unit March 23rd 2011 Economist Intelligence Unit 26 Red Lion Square London WC1R 4HQ United Kingdom Tel:+44 (0) 20 7576 8181 www.eiu.com
  • Japan’s twin disasters: What we know
    • The human cost - likely to exceed 10,000
    • Many companies (Sony, Toyota) have shut factories in affected area
      • A short term issue, and will depend on whether companies can divert orders to other factories
    • As much as 10% of national power production temporarily down
    • Rolling blackouts will continue until end-April
    • Possible long-term impact on power supplies
  • Japan’s twin disasters: What we know
    • Sendai accounts for half as much economic activity as area affected by Kobe in 1995
    • Supply chains nationwide disrupted
    • Government debt position (200% of GDP) worse now than in ‘95 (79%)
    • Volatility in global financial markets
    Kobe earthquake
  • Japan’s twin disasters: What we think we know
    • Economy will likely contract in Q2
    • Reconstruction (est US$200bn) could start quickly
    • Slowdown could be reversed before end of the year
    • Our current forecast? GDP +1.4%, down from 1.6%; better result in ’12
    • Commodity prices? Yen? To come
    Japan did not experience even one quarter of contraction in the aftermath of Kobe in 1995
  • Japan’s twin disasters: What we think we know
    • Exports to China, US, Southeast Asia could be affected
    • Imports from same places at risk
    • Replacement suppliers may jump-in
    • Japan may repatriate capital
    • Less demand for oil, commodities?
    • Commodity prices? Yen? To come
  • Japan’s growth vs. other major economies
  • Japan is a major consumer of commodities % of global consumption (2009) Source: Economist Intelligence Unit.
  • Japan’s twin disasters: What we know we don’t know
    • Will the nuclear crisis be contained?
      • If it is not, or if Tokyo is drawn in, all bets on economic impact are off
  • Scenarios for the Fukushima Daiichi nuclear plant: Benign
    • Benign scenario: 70%
    • Worries about radiation poisoning have triggered panic-buying of supplies, prolonged office closures
    • Economic activity in areas of Japan that did not sustain serious physical damage could return to normal fairly
    * Assigned EIU probability is subject to change as events continue to unfold.
  • Scenarios for the Fukushima Daiichi nuclear plant: Persistent uncertainty
    • Persistent uncertainty scenario: 27%
    • Even if the latest emergency measures succeed, as yet unforeseen problems could surface in the other reactors
    • This, in turn, would delay the reconstruction-driven up-tick in the rate of economic growth
    * Assigned EIU probability is subject to change as events continue to unfold.
  • Scenarios for the Fukushima Daiichi nuclear plant: Worse-case
    • Worse-case scenario: 3%
    • The outlook would deteriorate dramatically in the worst-case scenario of a nuclear meltdown accompanied by widespread contamination
    • The economic costs of the disaster would multiply accordingly
    * Assigned EIU probability is subject to change as events continue to unfold.
  • About the Economist Intelligence Unit (EIU)
    • Research arm of The Economist Group for business executives
    • 650 analysts and industry specialists worldwide covering
      • Analysis and forecasting for over 200 countries and territories
      • Risk assessment
      • Industry data and trends: automotive, consumer goods, energy, financial services, healthcare, technology
      • Market sizing
      • Custom client research
      • Visit www.eiu.com to register for free macroeconomic information on 187 countries
  • EIU’s Japan Analyst Kilbinder Dosanjh Senior Analyst, Asia Economist Intelligence Unit
  • Latest special reports from the EIU 2011 Liveability Ranking and Overview Report assessing living conditions in 140 cities around the world http://www.eiu.com/liveability Government Broadband Report and Index A report and index covering government plans for broadband development http://www.eiu.com/broadbandreport Triggerpoints: The world’s emerging car markets Forecasting demand in emerging car markets http://www.eiu.com/triggerpoints Download free executive summaries or purchase the full report
  • Contact for more information: Holly Donahue Senior Marketing Manager Economist Intelligence Unit [email_address] +1 212 541 0596