PIMCO CEO Mohamed El-Erian shared his thoughts on the economic outlook for Japan, following the tragic earthquake and tsunami that hit that nation Friday.
El-Erian wrote that the whole world is hoping that the heartbreaking human tragedies will soon give way to stories of rescues and the recovery of a society that is suffering enormous pain and disrupting uncertainties.
This is what he said about the Japanese economy:
While there is still considerable uncertainty, including on account of nuclear reactor risks, the experience of other countries suggests that the economic outlook will be dominated by five factors.
Japan’s economic growth rate will fall in the immediate aftermath of the natural disasters before rising sharply due to reconstruction activities.
Disruptions to supply chains and the loss of inventories will cause shortages and inflation to spike temporarily from very low levels.
The fiscal deficit and public debt will rise meaningfully due to lost revenues and, more importantly, emergency spending.
The central bank will ease monetary policy which, given policy interest rates floored at the zero bound, will involve the provision of extraordinary credit and liquidity facilities.
Last, the country will receive transfers from abroad, including the repatriation of funds held outside the country by Japanese residents.
Japan is a rich country that is also able to borrow at relatively low interest rates. As such, it definitely has the ability to rebound economically from these horrible natural disasters. Moreover, in a really good recovery scenario, Friday’s dreadful shock could even be a catalyst for internal political unity and for overcoming what has been two disappointing decades of economic performance. Indeed, a prolonged period of high and sustained growth is key to Japan’s handling of its domestic public dynamics.
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