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Aftershocks from Japan_110318c

Aftershocks from Japan_110318c

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Published by: Jonathan Swanson on Mar 18, 2011
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03/22/2011

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Atershocks rom
Japan
March 18, 2011
Stephen S. RoachMorgan Stanley Asia
The devastation—both human and physical —from the earthquake and tsunami inJapan is unfathomable. It is impossible at this point to gauge the full extent of the damage with any degree of precision. But we can nonetheless begin to assess its potential spillover effects on the rest of Asia and other major economies around the world.
he narrow view o the catastrophe’s economic impactis that Japan doesn’t really matter anymore. Ater all,more than 20 years o unusually sluggish trend growth inJapanese output has sharply reduced its incremental impacton the broader global economy. he disaster may producesome disproportionate supply-chain eects in autos andinormation-technology product lines such as lash drives,but any such disruptions would tend to be transitory.On the surace, the world’s two largest economies have littleto ear. Japan accounts or only 5% o America’s exportsand 8% o China’s. Under the worst-case outcome o acomplete disruption to the Japanese economy, the directrepercussions on the United States and Chinese economieswould be small—shaving no more than a ew tenths o apercentage point o their annual growth rates.
The narrow view is that a shock to Japandoesn’t have much of a global impact—mainlybecause its weakened post-bubble economyhas ceased to play a meaningful role in shapingglobal activity over the past 20 years.
Within the so-called G-10 developed economies, Australiahas the largest direct exposure to Japan—the destinationo about 19% o its total exports. he eurozone is at theopposite end o the spectrum, with Japan accounting orless than 2% o its exports.Among emerging-markets, the Philippines and Indonesiaare the most exposed to Japan, which absorbs about 16% o their total exports. South Korea, the third-largest economy in East Asia, is at the other end o the scale, relying onJapanese demand or only about 6% o its exports.But the narrow view misses the most critical consideration:this “Japan shock” has not occurred at a time o greateconomic strength. hat is true not only o Japan itsel,where two lost decades have let a once-vigorous economy on a less-than-1% growth trajectory since the early 1990’s.But it is also true o the broader global economy, which wasonly just beginning to recover rom the worst inancial crisisand recession since the 1930’s.
But the Japan shock has not occurred ata time of global strength
the world is stillin the throes of a fragile and anemic post-crisis recovery.
Moreover, the Japan shock is not the only negative actorat work today. he impacts o sharply rising oil prices andongoing sovereign debt problems in Europe are also very worrisome. While each o these shocks may not qualiy as the proverbial tipping point, the combination and thecontext are disconcerting, to say the least.Context is vital. Notwithstanding the euphoric resurgenceo global equity markets over the past two years, the worldeconomy remains ragile. What markets seem to haveorgotten is that post-bubble, post-inancial-crisis recoveriestend to be anemic. Economies grow at something muchcloser to their stall speeds, thus lacking the cyclical “escapevelocity” required or a sel-sustaining recovery. As a result,post-crisis economies are ar more vulnerable to shocks andprone to relapses than might otherwise be the case.Alas, there is an added complication that makes today’sshocks all the more vexing: governments and central bankshave exhausted the traditional ammunition upon which
Note:
This essay was published on March 17, 2011 by
Project Syndicate
and distributed to their global network of newspapers, magazines, and other media outlets.
 
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they have long relied during times o economic duress.hat is true o both monetary and iscal policy—the twomainstays o modern countercyclical stabilization. Policy interest rates are close to zero in the major economies in thedeveloped world, and outsize budget deicits are the norm.As a result, unconventional—and untested—policies, suchas so-called “quantitative easing,” have become the rageamong central bankers.All along, such unconventional policies were viewed asa temporary ix. he hope was that policy settings soonwould return to pre-crisis norms. But, with one shock ollowing another, the “exit strategy” keeps being deerred.Just as it is next to impossible to take a critically ill patiento lie-support treatment, it is equally diicult to weanpost-bubble economies rom their now steady dose o liquidity injections and deicit spending. In an era o extraordinarily high unemployment, political pressures only compound the problem.his raises perhaps the most troublesome concern o all:with a post-crisis world getting hit by one shock ateranother, and with central banks having no latitude to cutinterest rates, it is not hard to envision a scenario o open-ended monetary expansion that ends in tears.he dreaded inlationary endgame suddenly looms as avery real possibility.
Add in the impacts of sharply higher oil prices,sovereign debt problems in Europe, and thelack of traditional policy ammunition, and thepossibility of a meaningful shortfall of globalgrowth cannot be taken lightly.
None o this detracts rom the resilience actor. Yes, Japanwill rebuild, which will undoubtedly spur some type o recovery in its disaster-battered economy. hat happened inthe atermath o the Hanshin (Kobe) earthquake in 1995,and it will happen this time as well.But, just as the post-Kobe rebuilding did little to endthe irst o Japan’s lost decades, a similar outcome can beexpected this time. he upside o rebuilding—beyond theurgent restoration o normal lie or thousands o people—is only a temporary palliative or an impaired economy.hat’s only one o the lessons that Japan oers the rest o us. he Japanese economy has, in act, been on the leadingedge o many o the more serious problems that havealicted the global economy in recent years. From assetbubbles and a dysunctional inancial system to currency suppression and monetary-policy blunders, Japan has beenin many respects the laboratory o our uture.Unortunately, the world has ailed to learn the lessons o Japan. And now it risks missing another important clue.he signiicance o the earthquake and tsunami o 2011 isnot the relatively low magnitude o Japan’s direct impacton the broader global economy. he more meaningulmessage is how these shocks box the rest o us into an eventighter corner.
Stephen S. Roach, a member of the faculty of YaleUniversity, is Non-Executive Chairman of Morgan Stanley Asia and author of 
The Next Asia 
.

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