The wasteland: A few shattered buildings that survived the might of the tsunami stand sentinel over Minami Sanriku, where the devastation stretches as far as the eye can see(News Today) - The history of rich countries recovering, albeit painfully, from large natural disasters is encouraging. The resilience of Japan following the 1995 Kobe earthquake is the most obvious--and encouraging--example. The question hanging over Japan and the rest of the world: Is this time different?
Will physical damage, particularly the still-uncertain fate of nuclear-power plants, be more difficult to repair? Has globalization made the world more vulnerable to one big economy? Will the weekend's jarring videos and headlines from Japan, combined with unease about the Middle East and Europe, undermine financial markets already distrustful of global governments' ability to repay debts?
The immediate impacts on Japan are hard to quantify, but relatively easy to sketch out. Production will suffer. Japan's auto makers all but suspended domestic manufacturing. Sony Corp. shut six electronic-component factories. Kirin, Asahi and Sapporo breweries, which account for about 40% Japan's beer production, are out of action. Electricity supplies are disrupted.
Nomura economists had forecast Japan--whose economy contracted in the last quarter of 2010--would “exit the current lull“ in the second quarter of this year. Now they say that won't happen until the third or fourth quarter.
“Considering the major disruption to infrastructure such as roads and electric generation facilities, we think the short-term impact on economic activity could be greater than after the Kobe earthquake,“ they said in a note.
“But,“ added Glenn Macquire, Asia-Pacific economist for Societe Generale, “as we start to see a rebound in investment over the medium term, that will provide a floor under Japanese growth.“
Rebuilding following a disaster adds to measured gross domestic product, but that doesn't mean an economy is better off. If it did, governments could grow economies by blowing up cities and rebuilding them. GDP accounting doesn't reflect destruction in property, environmental damage or the loss of life--only the added output to replace what has been lost.
Scholars who examine the economic aftermath of natural disasters find that rich countries rebound more strongly than poor ones, and sometimes more quickly than anticipated.
“Many, if not most, of the media and others surveyed the broad destruction and predicted it would take as many as 10 years for Kobe to rebuild and for its economy to recover,“ Purdue University economist George Horwich wrote in 2000.
“In fact, in less than 15 months, manufacturing in greater Kobe was 98% of its pre-earthquake trend.“ After 18 months, all the department stories had reopened. The city's major expressway was rebuilt in 21 months. Reconstruction of the port took 26 months.“
Haiti, in contrast, is struggling to recover for the devastation of the January 2010 earthquake. And recovery was far from quick in Aceh, the Indonesian region hit hard by a tsunami in 2004.
Unlike Kobe, this quake hits Japan at a moment of psychological vulnerability, having just surrendered its rank as the world's No. 2 economy to fast-growing China. Among the factors that could make this time different from Kobe:
Will Japan have trouble financing reconstruction?
Japan's gross general government debt already amounts to more than 200% of annual economic output as of 2010, the International Monetary Fund estimates. That's more than double what Japan owed in 1995 when the Kobe earthquake hit.
In principle, Japan should easily be able to handle the bill. It is, after all, a rich country. And even if costs were ten times that of Kobe, they would add only about 7 percentage points to Japan's debt-to-GDP ratio. Japan, unlike the U.S., relies mainly on domestic savers to lend it money, and lately they've been doing that at exceedingly low interest rates.
Much, though, depends on how global markets react. If investors, spooked by high government debt levels in Europe and the U.S., push up Japan's borrowing costs, they could create financial stresses.
“I don't think we can take for granted that the bond markets will take things in stride in the current fiscal environment,“ says economist Maurice Obstfeld of the University of California, Berkeley. “The issue of sovereign default for rich economies was not on the radar in 1995, now the rich economies have put it on the radar.“
Will Japan bring savings home, causing strains in financial markets and troubles for U.S. and other big borrowers?
In 2010, Japanese savers invested $166 billion in other countries, the IMF estimates. Japan is one of the largest buyers of U.S. Treasury bonds. As Japan's government and companies bring home the resources needed to rebuild, those capital flows could wane, pushing down the dollar and increasing U.S. borrowing costs at a time when that country's government-debt level is also a matter of global concern. In early 1995, capital flowed back into Japan for only a couple of months, and then returned to the pre-Kobe direction and size.
One perverse result of money flowing back to Japan from overseas--or simply less Japanese savings leaving the country--could be an increase in the value of the Japanese yen, which would have unwelcome effects on Japanese exporters whose production hasn't been disrupted. Analysts expect the Japanese government to intervene if the yen climbs too rapidly.
“Japanese authorities will not let the yen appreciate with speculative flows. I think they will be very decisive,“ Yuki Hashimoto, an analyst at Morgan Stanley Asia, said by email Sunday. As of Friday, the yen rose 12.8% against the dollar last year, and has risen gradually in the early months of this year.
The Bank of Japan, which vowed “to do its utmost to continue ensuring stability in financial markets,“ was expected by analysts to pump lots of credit into the financial system to keep it functioning and prevent any unwelcome increase in short-term interest rates, now at zero.
Some analysts predict the central bank might buy more government bonds if yields start to rise. Another option is to expand previously initiated purchases of private securities or lending directed at particular sectors.
Are global supply chains so taut that a disruption in the world's No. 3 economy will be felt around the world?
Japan's factories play an outsize role in global production--churning out products and parts for other company's goods, ranging from a fifth of the world's semiconductors to large shares of the world's most advanced machine tools and solar panels. Japan produces parts needed for flat TVs and iPads, as well as the control mechanisms used on everything from industrial machinery and mining machines.
A wide range of industries, from car and steel plants to beer brewers and paper factories, shut down in the wake of the quake and tsunami. How long production is halted depends not just on the direct damage to those plants, but other factors, such as the availability of power needed to run operations.
Japanese officials have warned rolling blackouts could endure for long periods as the nation rebuilds and repairs it electricity network. The result could be shortages of key components around the world, though excess industrial capacity in several big developed economies gives the world some manuevering room.
What will the earthquake do to global energy markets?
Citing the earthquake and the latest in the Middle East, economists at J.P. Morgan Chase on Friday boldly predicted “an unusual amount of volatility in global oil prices in coming weeks.“
The major factor, of course, is what happens next in the Middle East. Japan is the world's No. 3 oil importer, after the U.S. and China; its troubles do nothing to global oil supply. Disruptions in production may limit Japan's near-term demand for energy; oil prices fell in the immediate aftermath of the quake.
Over time, though, the shuttered nuclear plants could lead Japan to increase imports of oil, natural gas and coal. Analysts estimated that replacing all of Japan's nuclear capacity with oil would mean importing 375,000 more barrels a day, on top of the current demand of about 4.25 million barrels.
The worst-case scenario, though, centers on the nuclear plants--and the risk of a catastrophe that would have long-term effects on the people and the land surrounding the crippled plants.
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