Young Investor

Japan's aftershocks on other economies

Vidya Bala | Updated on March 19, 2011


If the irreparable loss of lives is not distressing enough, the calamity in Japan holds negative implications for the country's economy, equity markets and its trade as well. For that matter, the impact may not be restricted to ground zero alone. Its after-shocks would be experienced across most other economies as well. For instance, natural disasters such as Japan's Kobe earthquake in 1995, the South Asian Tsunami in 2004 and Hurricane Katrina in 2005 have all taken a toll on the respective country's economy.

While the economic impact of most natural disasters tend to be ephemeral, the tragedy that's struck Japan now may take a long time to repair.

Toll on economy

Take the case of industries that are directly and indirectly hurt by the Japanese disaster. Japan's Cosmo Oil's Chiba refinery, for instance, caught fire during the calamity. This would result in production loss of 2,20,000 barrels per day until the production is resumed. Similarly, there are quite a few electronics, machinery and auto part makers in the quake-affected region, which witnessed losses, and may now have to infuse funds to move to normalcy. There is also the case of some industries that are in the vicinity of the nuclear plant, which face far more uncertainty now, as the radiation levels have reached proportions that may not allow human habitation.

While these are direct implications of the disasters, there are umpteen cases of indirect ones too.

For instance, a number of companies including auto major Toyota and consumer electronics giant Sony had to halt production either due to shortage of power or because its suppliers, partners and dealers were directly hit by the earthquake. Nuclear energy makes up for as much as 30 per cent of Japan's total power. The current shut down of its nuclear plants therefore has forced the country to go into power conservation mode.

The breakdown in key infrastructure – power, port, airports and water – would have ripple effect across other industries too. This means even though the affected region accounts for just 6.2 per cent of Japan's GDP (according to Barclays Capital's report on earthquake implications), the overall economic loss would be much higher! Besides, Japan as an economy has been struggling to wriggle out of stagnation for nearly two decades. The expected fall in economic output from now on may only worsen the situation.

However, on a somewhat positive note, it may also help Japan rebuild itself through huge stimulus plans, thus boosting GDP growth.

This would be easier said than done, as the country, known for its large national debt, had a debt to economic output (GDP) ratio of 121 per cent in 2010 according to IMF data (India' debt to GDP was close to 80 per cent in 2010). What is the implication? Well, a highly leveraged economy may not be rated too favourably by credit agencies, and this in turn could affect its ability to borrow at reasonable rates.

Equity slump

The stock markets obviously seem to have factored such eventualities already. The Nikkei index slumped 16 per cent in two days after the March 11 disaster, making it the worst performer among major global indices. Stocks such as Tokyo Electric Company, Toyota, Sony and Nissan individual have seen a sharp retreat in their prices over the last week. The reasons for this are two-fold. One, the confidence of foreign investors in Japan may have taken a beating, leading to an exodus of funds from the country. And two, the Japanese companies may be starring at lower earnings potential in the medium-term, thus impacting the market fundamentals.

Trade imbalance

The export-import market in Japan may also be severely altered as a result of the calamity. This would have repercussions on global trade, as Japan is the third largest economy in the world. Take the case of major automakers such as Toyota or Nissan or Sony. These companies, which are also big exporters, may see a fall in production and therefore a dip in their exports to other nations. Besides, spare parts and component supply too might get hit. And since Japan is a significant consumer of thermal and coking coal and metals, export by other countries to Japan may be hampered/shipments cancelled in the short-term.

Global impact

Trade and stock markets clearly have global implications. So what could be the implication for countries such as India as a result of the turmoil? A key segment that keeps emerging markets afloat are FIIs. Hence, a withdrawal of Japanese money can impact stock markets across the globe, of course depending on the exposure that Japanese funds have in each country. Such withdrawals may be inevitable considering the financial need in Japan post the earthquake.

While the FII inflows into India from Japanese funds have already been dwindling over the years and therefore may not have a significant impact, what may hurt India is the foreign direct investment. Japanese FDI into India (investment made in a country on productive assets such as factories, land and natural resources such as minerals) has grown ten-fold in the last three years. This essentially means that further investments (FDI) in a Nissan unit in India or fresh investments from Toshiba for power equipment joint venture in India may seem uncertain or incur delays.

The event can also upset the fragile global crude oil demand-supply. With disruption in power from nuclear plants, the country's demand for crude may well go up and could push global prices up. More importantly, the letting out of radio active material has (once again) brought to debate the safety of nuclear energy. Any further damage on this front in Japan could even raise questions on use of nuclear energy globally.

These are but few implications of the disasters. As they say, fortune knocks but once, but misfortune has much more patience. However, given the resilience that Japan has demonstrated in the past, its patience may yet help it overcome the misfortunes.

Published on March 19, 2011

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