March 16, 2011 in Business

Dip in markets seen as short-term issue

Japan’s economic upheaval unlikely to upend globe
Erika Kinetz Associated Press
 
Associated Press photo

A man walks past a stock price board in a street Tuesday in Tokyo. Japan’s Nikkei stock index fell nearly 11 percent during the unfolding nuclear crisis before rebounding in early trading today.
(Full-size photo)

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.

The disaster frightened financial markets from Tokyo to Wall Street on Tuesday. Japan’s Nikkei average lost nearly 11 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. Japan’s stock market rebounded in early trading today; the Nikkei 225 index gained more than 6 percent before ending its morning session up 4.4 percent. 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 economic 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.

Stocks Tuesday plunged 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,” 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.

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.

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 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.


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