Japan’s Earthquake & Tsunami March 2011: The Economic Impact

The effect of Japan’s earthquake and tsunami on the Japanese and world economy.

Japan’s March 11, 2011 earthquake and tsunami.  An 8.9 magnitude earthquake hit Japan on
March 11, 2001 and the result of the earthquake was a large tsunami that caused massive
devastation. Japan has been undergoing a humanitarian crisis as thousands of people have
been displaced due one of the strongest earthquakes in modern history. What will be the
economic impact of the disaster?

The full extent of the economic impact tsunami is apparent , hundreds of factories were shut
across Japan, warnings of rolling blackouts and predictions from economists that the disaster
would push the country into recession.

The Bank of Japan were preparing to pump billions of yen into the economy when it
announces an emergency "quake budget" to prevent the disaster derailing the country's
fragile economic recovery.

Toyota and Nissan said they were halting production at all of their 20 factories. Toyota, the
world's largest carmaker, evacuated workers from two plants in the worst affected regions
and has not been able to reach the sites to inspect the damage. The plants make up to 420,000
small cars each year, mostly for export. Two of Honda's three plants remained closed.

Other manufacturers have also reported major damage to their factories, with Kirin Holdings,
Fuji Heavy Industries, GlaxoSmithKline and Nestlé among those to halt operations. Sony, the
electronics group, had suspended production at eight plants. At one plant, 1,000 workers had
to take refuge on the second floor after the tsunami hit. All ports have been closed amid
warnings of aftershocks to come.

Japan's utilities providers are warning of rolling blackouts across the country in the coming
days because they are unable to meet electricity demand. Nuclear power generates about a
third of the country's electricity but six reactor units at Fukushima remain offline indefinitely.

An estimated 2 million homes are without power and about 1.4 million do not have running
water. Equecat, a risk consultancy, estimated over the weekend that the economic losses from
this earthquake would total more than $100bn (£62bn).

Analysts said one of the Bank of Japan's priorities was to advance "soft" loans to commercial
banks to make sure they do not run out of cash as customers in the affected areas rush to
withdraw savings. The central bank is expected to flood money markets with more cash than
usual, partly to stop the yen from rising too much. Japanese firms and investors are racing to
repatriate their assets, selling dollars and other foreign currencies, to prepare for the cost of
rebuilding their domestic economy, which will push up the yen's value. It is feared this will
make exports more expensive and choke off the hoped-for, export-led recovery.

David Buik at BGC partners said: "The Bank of Japan, I am sure, will be on high alert, doing
everything in its power to stop the yen becoming too strong, as well as providing the banking
sector with all the liquidity it may require.
"Japan's economy is export-led. So with such an inordinately large budget deficit, it will be
imperative to get those factories open again." The bank has little scope to cut interest rates, as
they are almost at zero. Economists said the bank was likely to hold fire on more drastic
action while it assesses the economic impact 0f the disaster.

Daiwa Capital Markets, the Japanese-owned bank, said it was likely the economy would be
pushed into recession, with exports particularly badly hit.

Economists had expected growth of 0.3% this quarter but now expect a second successive
quarter of negative growth.

The huge cost of rebuilding the affected areas will push up Japan's public debt, which is
already the largest among advanced economies. The Nikkei index, which fell 1.7% on Friday,
is expected to post large falls when it reopens as the scale of the damage becomes clear.
Some analysts warned it could tumble below the psychologically important 10,000 mark,
which would represent a 2.7% drop from Friday's close, with one analyst at Toyota Asset
Management telling Reuters it could fall below 9,000 soon.

Oil prices, which fell by 3% on Friday, are likely to continue falling this week. Japan is the
one of the world's largest importers of oil but demand is likely to drop as industrial activity
falters.

Strategists have been analysing the economic impact of Japan's last major earthquake, in
1995 near Kobe, for clues.

The Impact of Japan’s March 2011 Earthquake & Tsunami on the Global
Economy

Japan is the 3rd largest economy in the world and is also 3rd on the list of countries that
consume oil.  The earthquake disaster may have a deleterious short – medium term effect on
their economy.  China is now the second largest economy in the world and they have been
growing at a slower pace recently which could also have a short term impact on world
commodity prices along with Japan.  Japan and China may experience decreased rates of
growth but the U.S. is expanding which may help balance aggregate demand for goods and
services globally.

Japan’s Earthquake & Tsunami 2011: The Effects on the Economy – Short
Vs. Long Term

Longer term, the rebuilding process will have positive effects on Japan’s economy which still
hasn’t fully recovered from an economic recession that began in the 1990′s.  The earthquake-
tsunami that occurred on March 11, 2011 will have a negative impact short term on the
Japanese and world economy but these effects should not persist long term.
The consequences can be:-

1. If the government issues newer bonds for rebuilding and reconstruction, the country
might face huge debt crisis, since the country has been still in the process of
recovering from its past recession and shrinking economy. However for a country like
Japan, which has a great infrastructure, good wealth conditions, huge economy, top
class building codes, better emergency readiness and excellent hospitals, it should be
able to recover from this tragedy as quickly as any nation could. The major challenges
in front of the country is, facing the rebuilding costs, demographic challenges and
existing fiscal burden.
2. According to the analyst there could be short term economic effect on other countries
as well. Like U.S. automakers could see short term benefits. US businessmen who are
in manufacturing segment might feel some boost in the business owning to the
growing demand for reconstruction of houses and other buildings. The major impact
will be on the Japanese companies who export their products like Honda, Toyota, and
Sony as closed production centres and ports might add up to the financial burden.
3. Since Japan is the third largest importer of oil, shutting down of the Japanese
refineries due to the disaster can lower demand for oil consequently lowering the
crude oil prices.Australia's mining industry can get affected due to closure of Japanese
steel mills.In Japan many factories have been shut down or damaged. It is said that
effect on the technology market will be huge.
4. Japan's Nikkei index dropped 1.7% and the Hang Seng index in Hong Kong declined
1.5% after the tsunami hit. In the U.S., stocks were basically flat. There is a
probability that yen might rise against the dollar due to financial flows into Japan
from overseas.
5. In a statement, officials of The Bank of Japan, the country's central bank said that the
bank would ..".continue to pump liquidity in the financial system to ensure the
stability in financial markets and to secure the smooth settlement of funds, in the
coming week". According to the latest report, the bank pumped 15 trillion yen ($183
billion) into money markets to assure financial stability. According to an estimate by
an insurance industry analyst, the insurance industry's losses in Japan at $10 billion.
6. It is said that Japanese industrial sectors might face a slowdown due to the shortage of
electricity generation capacity. According to IHS Global Insight estimates, real GDP
growth of Japan could decline by 0.2 to 0.5 % point this year. But if the ongoing
nuclear crisis continue to rise further then the impact can be much larger
7. Since Japan’s exports and imports are a relatively small share of GDP, the trade flows
across the globe will not be effected much. However global supply chains (autos,
telecommunications and consumer electronics) can have a significant downturn.
According to the latest analysis, there will be a negligible negative impact on global
growth this year.
8. In the US, there will be slight disruption in the production part. US operations of
Japanese automakers might face a slight setback due to unavailibility of parts arriving
from Japan and disrupted supply chain. However this can be an advantage to the
domestic producers as demand will shift to them
9. There will be a fall in the sentiments of firms and household sector as they will be
fearful in their investment decisions.
Japan’s tsunami and economies like Philippines

WHEN THE world’s third largest economy suffers a natural disaster , it is inevitable that its
economic impacts will permeate through the world’s economies. Analysts expect that the
effects on the Philippines would be significant. Japan, after all, occupies a dominant position
in the whole range of external economic relations, spanning trade, investments, labor
migration and foreign assistance.

Last year, Japan was the single biggest buyer of exports, accounting for 16.2 percent of all
export earnings. It was also the single biggest source of imports (12.3 percent). Japan is also
consistently among the top three sources of foreign direct investments (FDI) in country.
Over a million Filipinos are estimated to be residing and working in Japan, counting both
documented and undocumented ones. And Japan has traditionally been the largest country
donor of official development assistance (ODA) receive from abroad. With economy’s close
linkage to that of Japan, their tsunami would have to have some impact on Philipines.

So how will the disaster affect the Japanese economy, and with it, economies closely
dependent on it like the Philippines? There is no disagreement about the disaster’s serious
short-term impacts, particularly the loss of possibly tens of thousands of human lives, untold
property damage and a standstill in production. Nouriel Roubini, the US economist said to
have predicted the 2008 global financial crisis, believes that the earthquake and tsunami are
“the worst thing that can happen in Japan at the worst time.” With a government budget
deficit already running at around 10 percent of gross domestic product (GDP), the Japanese
government will be forced into massive spending to repair the damage, both physical and
economic. This would also put into serious question the Japanese economy’s longer-term
stability due to the huge imbalance in government finances that would result. But such
massive spending would actually perk up their economy after overcoming an initial
slowdown due to the immediate damage to production facilities. When an earthquake of
magnitude 6.8 hit the city of Kobe in 1995, economic growth in its aftermath exceeded 3
percent on an annual basis, a blessing then. Japanese economists also cite that most of their
industrial production happens in the unaffected southern areas, and production will simply be
shifted to the southern plants for now.

What are the near-term implications for the Philippine economy? The short-term slowdown
in industrial activity—and a halt in some cases—might be expected to translate directly into a
short-term slowdown in job opportunities, and outright layoffs in some cases, for Filipino
workers in that sector. Some slowdown or contraction in the services sector is also likely,
leading to a discernible slowdown in jobs for Filipino service sector workers, including in
entertainment. Our exports to Japan of raw materials and intermediate components that feed
their industries are also likely to see a short-term slowdown. Along with the overall
immediate slowdown in the Japanese economy will come a slowdown in FDI coming from
their direction. And with heightened pressures on the Japan government’s finances, it is also
logical to expect a negative impact on Japanese ODA in general.

Is the rest of the world economy going to be negatively affected by Japan’s difficulties,
thereby having second-round effects on us in turn? The global effects are likely to be mixed.
Already, the Japanese yen has begun to appreciate, which is being attributed to large-scale
entry of funds sent from abroad to help fund repair and reconstruction. Analysts see an
impact on fuel prices to be among the more immediate effects, as Japan is also the third
largest oil consuming country worldwide. With a number of its nuclear power plants placed
out of commission by the disaster, Japan is expected to hike its purchases of natural gas for
its gas-powered power plants to take up the slack. This would put upward pressure on natural
gas prices. On the other hand, reduced demand for petroleum due to the short-term slowdown
in industrial production would have the opposite effect on oil prices. The latter would be a
welcome neutralizer for recent upward movements in oil prices due to the spreading turmoil
in Middle Eastern countries.

Japan’s tsunami and our economy

 As far as Indian stock markets are concerned, the crisis may not have a direct impact on
Indian economy and business.
 No re-work in investment decisions is required because of this tragedy in Japan.
 However, the disaster may have affected investor’s sentiment, the effect of which will be
evident only as the stock market opened. Investors these days have so little confidence in the
health of the national and world economy that they sell shares at the slightest hint of anything
that might impact it negatively, and that pushes the stock market down.
 The 153 points fall has more to do with lower factory output growth which raised concerns of
RBI raising interest rates, amid a weak global trend. A hike the key policy rates will have a
negative impact on Indian markets.
 In the coming days, as the economic impact of the disaster gets assessed, the emerging results
may give fresh trigger to the markets.
 In short, there nothing to worry about. Only small hiccups due to panic should be expected.

Japan’s Earthquake & Tsunami After-Effects

 The Dow Jones Industrial Average fell below a key support level that day.  The Dow
fell below 12,000 which is a key psychological trader observation level. 

 The Nikkei fell 8% in the first five days after that earthquake but then rose by 5% in
the next 10 days. After the initial disruption, the economy grew by more than the
trend growth rate at the time for 1995 and 1996.