We’re all notified of the tragedy in Japan, with horrific photos and video footage of the aftermath of the earthquake and 10-meter Tsunami. The humanitarian disaster, with thousands dead and tens of thousands homeless, will continue to capture the world’s attention. If you can bear to look, here’s some remarkable Japanese TV footage of the tsunami roaring into the Japanese coastline: click here.
What impact will the disaster have on the global economy and investment portfolios? Japanese stocks fell almost 11% Tuesday as the nuclear disaster becomes more ominous. This decline is on top of a 6.2% drop on Monday after a 1.72% drop on Friday. While significant, this decline was actually less than the 7.5% decline that followed the 1995 Kobe earthquake until the extent of the nuclear leaks became evident. London’s Guardian newspaper reported that the Bank of Japan injected 21.8 trillion yen ($266.9 billion) into the Japanese economy, as a measure to limit the financial devastation wreaked by the crisis.
Without doubt, the double whammy of the earthquake (now raised to a 9.0 on the Richter scale) followed by the Tsunami, has shaved some percentages from Japan’s Gross Domestic Product (GDP), just as 9/11 did to the United States. It is not only the physical damage, but the psychological toll of these events, that extracts from a nation. In 2010 the World’s economy was estimated at 62 trillion dollars according to the CIA World Factbook. So even a ten percent decline in Japan’sGDP due to the effects of this disaster, which would be large for any economy to suffer, would only represent less than a 1% decline in the World’s GDP. (Please note the CIA World Factbook estimates that Japan’s GDP for 2010 was about $5 trillion and a decline of 10% would represent $500 billion.) According to the Organization for Economic Cooperation (OECD) the US GDP contracted 4.14% over 6 quarters (a year and a half) during the 2008 Great recession.
The hardest-hit Japanese stock is likely to be Tokyo Electric Power Company, which has had to close power plants and is fighting core meltdowns in three nuclear facilities. Toyota, which is now the world’s largest car maker, has announced that it will close 12 assembly plants across the country until at least Wednesday night, causing $72 million a day in losses.
The disaster also had a counterintuitive impact on global oil prices; crude prices actually fell 3% on Friday and slid further on Monday as analysts expected lower demand in the short-term from the world’s third-largest oil consumer. Longer-term, prices could be pushed up. Japan typically receives about a third of its energy from nuclear power, but its power capacity fell by more than one-fifth as 11 reactors went off-line. Japan may be bidding against the world for oil supplies, since oil and gas are the most plausible energy replacements to its nuclear generators. Of course the additional demand comes as Libyan oil fields have come off-line.
How the disaster will affect other countries is uncertain. U.S. shares fell 1%, and European shares dropped 1.5% on Monday, but the U.S. News & World Report web site quoted several international economists who believe that the damage is unlikely to spread, and who expect the high-savings Japanese to rebuild quickly and efficiently. The Japanese do hold about 10% of U.S. government debt, so if the Japanese decide to repatriate funds to pay for a massive cleanup and rebuilding effort, it could raise government bond rates. We believe that is probably unlikely as the Japanese Government will not want to cause the dollar to drop against the Yen anymore than it has due to the harm that would have to its many exporters such as Toyota, Sony and Mitsubishi to name only a few.
The U.S. News & World Report analysis further speculated that the Japanese auto industry may have to temporarily curtail shipments of the Toyota Yaris, Scion xD and xB, Honda CR-V, Accord and Fit and Acura TSX and RL. Dealer networks normally carry a 30-day supply of autos, so the shortage won’t become immediately apparent; a bigger issue is whether Japanese auto makers will be able to find replacements for the parts suppliers whose factories were destroyed, and whether U.S.-made models will suffer from a shortage of parts shipped from Japan.
On a wider note, the entire Nuclear industry is shaking from this problem. Japan probably obtains more power from nuclear energy than any other nation and, with their lack of natural resources, they probably will continue that dependence. Europe and the United States are rethinking their nuclear strategies. So in the short term, oil prices will probably rise after a temporary drop as Japanese demand declines during the aftermath of this event.
Sources:
Guardian articles: http://www.guardian.co.uk/world/2011/mar/14/bank-japan-injects-165-billion-pounds
http://www.guardian.co.uk/world/2011/mar/13/japan-economy-recession-earthquake-tsunami
U.S. News & World Report:http://money.usnews.com/money/blogs/flowchart/2011/03/14/how-japans-quake-will-rattle-the-world-economy
