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How Japan Crisis May Alter Global Economy—Oil to Rates

AP
Tuesday, 15 Mar 2011 | 4:21 PM ET

Japan's earthquake and nuclear crisis have put pressure on the already fragile global economy, squeezed supplies of goods from computer chips to auto parts and raised fears of higher interest rates.

A damaged gas station shows the destruction after the earthquake struck on March 11
Getty Images
A damaged gas station shows the destruction after the earthquake struck on March 11

The disaster frightened financial markets from Tokyo to Wall Street on Tuesday. Japan's Nikkei average lost 10 percent , and the Dow Jones industrials fell so quickly after the opening bell that the stock exchange invoked a special rule to smooth volatility.

Yet the damage to the U.S. and world economies is expected to be relatively moderate and short-lived. Oil prices are falling, helping drivers around the world. And the reconstruction expected along Japan's northeastern coast could even provide a jolt of economic growth.

A weaker Japanese economy could help ease global commodity prices because Japan is a major importer of fuel, agricultural products and other raw materials, notes Mark Zandi, chief economist at Moody's Analytics.

Even "assuming a drastic scenario," Bank of America economist Ethan Harris estimates, the disaster would shave just 0.1 percentage point off global economist growth—to 4.2 percent this year.

"Japan has not been an engine of global or Asian growth for some time," says Nariman Behravesh, chief economist at IHS Global Insight. "This means that the impact of much lower Japanese growth on the world economy will be probably limited and small."

Japan's contribution to the world's economy fell from 18 percent in 1995 to 9 percent in 2010, according to CLSA. And the area hardest hit by the quake accounts for just 6 percent to 7 percent of Japan's output, about half as much as the area hit by the 1995 Kobe quake, the Organization for Economic Cooperation and Development estimates.

After previous catastrophes, Japan has proved resilient. After the Kobe quake, manufacturers returned to normal production levels within 15 months, according to the CLSA. Four in every five shops were back open in a year and a half. All told, Japan's comeback defied dire warnings that it would take a decade to rebuild.

For now, though, the latest quake, the resulting tsunami and the threat of contamination from a damaged nuclear plant have spooked financial markets. Investors are fretting about the effects on companies around the world. Japan, the world's third-largest economy, accounts for about 10 percent of U.S. exports.

The Dow Jones industrials were down more than 180 points in mid-afternoon trading. Stocks plunged almost 11 percent in Japan, 5 percent in Germany and 4 percent in France.

Autos and auto parts make up more than one-third of U.S. imports from Japan. As a result, shutdowns of Japanese auto factories could disrupt production at U.S. plants owned by Japanese automakers.

At the same time, some U.S. auto parts makers could benefit if Japanese plants in the United States substitute U.S. parts for those they usually get from Japan, Behravesh says.

A big wild card is the fate of Japan's damaged nuclear power plants.

"If the nuclear crisis turns into a full-blown catastrophe, then the negative effect on growth this year will be much larger," IHS' Behravesh says.

Another unknown is the impact of the disruptions to Japan's power supplies. Behravesh estimates about 10 percent of Japan's electricity generation could be off line for several months. If so, that would disrupt steel, auto and other production.

Will Japan Sell US Treasurys to Raise Money?

Investors fear that Japan will struggle to finance reconstruction, which is expected to cost the government at least $200 billion. The Japanese government's debt is already an alarming 225 percent of the country's economic output.

A person, who is believed to be have been contaminated with radiation, in a white bag is carried by soldiers at a radiation treatment centre in Nihonmatsu city in Fukushima prefecture on March 13, 2011.
Yomiuri Shimbun | AFP | Getty Images
A person, who is believed to be have been contaminated with radiation, in a white bag is carried by soldiers at a radiation treatment centre in Nihonmatsu city in Fukushima prefecture on March 13, 2011.

Some worry that Japan will sell some of its vast holdings of U.S. government debt to raise money. Doing so would push the prices of U.S. Treasury bonds down and yields up, raising U.S. interest rates.

But Treasury Secretary Timothy Geithner on Tuesday dismissed the fears of a Japanese fire sale of Treasury debt.

"Japan is a very rich country and has a high savings rate," he said. It "has the capacity to deal not just with the humanitarian challenge but also the reconstruction challenge they face ahead."

What's more, the Bank of Japan has been buying Treasurys and other assets as it pumps money into the financial system to restore calm.

The quake has damaged roads, ports, airports and factories, disrupting the shipment of goods in and out of Japan. The disaster blindsided multinational companies that were bracing for trouble in their transportation lines on the other side of the world—at the Suez Canal or elsewhere in the Middle East where protests are destabilizing countries from Bahrain to Libya, says Patrick Burnson, executive editor of Supply Chain Management.

It's also disrupted auto production, shutting down auto and auto parts factories. Analysts at Tong Yang Securities in South Korea "do not expect production to normalize any time soon" in Japan. Even plants that stay open may have to wait for parts to arrive, a problem made worse because so many factories follow just-in-time supply management and keep few parts on hand.

Car plants in Thailand could have a harder time getting steel, much of which is imported from Japan.

Prices for goods that need Japanese parts could rise while companies scramble to find supplies. Japan supplies computer chips for cellphones and iPads. Objective Analysis Semiconductor Market Research in California predicts the quake will cause "phenomenal price swings and large near-term shortages" of those chips.

Chinese companies are bracing themselves for losses and delays from disruptions in shipments of high-end electronics and auto components from Japan and some are looking for import replacements from South Korea or Taiwan, according to the International Business Daily, the official paper of China's Commerce Ministry.

Some analysts note that companies and consumers that now buy Japanese products can often find alternatives made elsewhere.

"What is made in Japan now has lots of competitive alternatives that didn't exist 25 years ago," says Peter Morici, a professor at the University of Maryland and a former director at the U.S. International Trade Commission. "If there aren't as many Camrys in the country this year as there might have been, you might have a couple hundred thousand additional Ford customers. If those people have good experiences with those cars, it could change buying patterns for life."

David Rea, an economist with Capital Economics in London, said, "You'll have Japan's competitors—largely South Korea and Taiwan who are in high end manufacturing, and China as well—come in and undercut Japanese businesses experiencing disruption from the earthquake."

If Japan's infrastructure doesn't get rebuilt quickly enough, Japanese companies may transfer production overseas to pick up the slack, Rea added.

The reconstruction of Japan's northeastern coast might also provide business opportunities for foreign countries. Malaysian timber, for instance, will likely be needed to rebuild homes and other buildings.

IHS predicts that the quake will "ultimately boost" U.S. exports to Japan.

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