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. Ater 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 eects in autos andinormation-technology product lines such as lash drives,but any such disruptions would tend to be transitory.On the surace, 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 let 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 qualiy 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 haveorgotten 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
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