3:00pm

Sun March 13, 2011
Asia

Japan Disaster May Have Global Economic Impact

Originally published on Mon March 14, 2011 6:59 am

Transcript

GUY RAZ, host:

When disaster strikes anywhere in the world, Japan is one of the first countries to open its pocketbook. Japan is the second largest foreign aid donor in the world, due in large part to its huge economy. But given the billions of dollars in damage the country now faces, there are also concerns about what kind of impact it will have on the economy.

Robert Madsen is a Japan scholar and senior fellow at MIT's Center for International Studies. And he joins me from Stanford in California.

Robert, first of all, we are talking about a manufacturing powerhouse. Japan is a net exporter. Outline for us how the disaster could affect Japan's economy in the short to medium term.

Mr. ROBERT MADSEN (Senior Fellow, Center for International Studies, Massachusetts Institute of Technology): The effects are different in the short and the medium term. You have to remember that Japan is a country that has been either in or on the verge of recession for over 20 years.

And the major reason for that is that there's simply not enough domestic spending. In that sense, anything which causes government to - or companies to spend more actually helps the economy. And the precedent for this is the 1995 Kobe earthquake.

RAZ: Right.

Mr. MADSEN: A great deal of damage was done to the economy, and over the next couple of years, companies and the government had to spend massive amounts of money rebuilding infrastructure and factories.

So if we use that, apply that analogy to today's situation, in the short term, of course, because there's been so much disruption, growth will decelerate.

But over the medium term, say, the next two or three years, my guess is that there'll be a massive increase in spending on plants and equipment and highways and ports. So Japan's economy is likely to grow significantly faster as a result of this crisis over the medium term.

RAZ: Even though the economy shrunk last year. Let me ask you about oil for a moment because, of course, we've seen huge spikes in prices in recent months, obviously because of the instability in North Africa and the Middle East. Now, given the unfolding crisis with those nuclear power plants in Fukushima, could that have the effect of increasing demand for oil?

Mr. MADSEN: If you look at demand for oil globally, because of the growth of India, China, a few other major economies, growth was trending upward very significantly. Now, if the events in Japan discredit nuclear power globally, we'll see China and some of these other countries cut back on their investment in nuclear facilities, which translates directly into much stronger demand for oil.

So one of the things I would be worried about is that oil prices, which have been going up, are likely to go up significantly more. But I think we're all going to pay a lot more at the pump.

RAZ: Japan is also a major investor overseas. Could we start seeing Japanese money pulled from foreign markets? And if so, what kind of impact might that have on the global economy?

Mr. MADSEN: Yes, at least in the short term, Japan is going to have to repatriate a lot of the money it's invested abroad in order to pay for the reconstruction of all the factories and other things within the country that have been damaged.

So that would suggest that the yen will strengthen in the short term. Money will probably flow out of the major Western investment markets, the U.S. Treasury market and other places, possibly pushing up interest rates a little bit.

That, of course, will make things much more difficult for the Federal Reserve because now they're going to have probably upward pressure on interest rates in the United States, which would mean they'd like to loosen, but they can't loosen if oil prices and other commodity prices are increasing, which now seems more likely.

So I think in a number of different countries, this makes the conduct of monetary policy a lot more difficult.

RAZ: Some sobering news from economist Robert Madsen. He's a Japan scholar at MIT's Center for International Studies.

Robert, thank you.

Mr. MADSEN: A pleasure. Transcript provided by NPR, Copyright NPR.

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