Mon March 14, 2011

Tsunami's Effect On Japan's Economy Hard To Judge

Stock markets plunged around the world Monday on concerns that the earthquake, the tsunami, and the nuclear crisis could devastate Japan's economy and push the rest of the world back into recession.

Japan has the third-largest economy in the world, and a disruption of manufacturing there would have ripple effects around the globe, including in the United States.

But economists say it's much too soon to say whether the worst-case scenarios will actually come to pass.

Japan has a standard by which to assess this damage: The 1995 earthquake that devastated the city of Kobe, west of Tokyo, killed more than 5,500 people and caused more than $100 billion of damage.

The earthquake Friday was worse; the death toll will surely be higher. It was accompanied by a tsunami that wiped out whole towns and cities, and it triggered a nuclear crisis whose dimensions are not yet clear.

Nevertheless, some economists say that this disaster may prove less consequential in economic terms than the Kobe quake, because of where it happened.

"The northeast region is not as much of a manufacturing hub as western Japan," says Nicholas Szechenyi, who is a Japan specialist at the Center for Strategic and International Studies. "So that might contribute to the argument that the economic impact in the long-term might not be as great."

Nearly a million people live in or around Sendai, the city hit hard by the earthquake and tsunami. But it's relatively isolated from metropolitan Tokyo, which is Japan's economic center.

Marcus Noland, of the Peterson Institute for International Economics, is watching to see what happens in regions that may not be physically damaged — but are connected through networks to the disaster site.

"The most likely channels, in most cases, are things like the transportation system, the electrical grid, communications networks," Noland says.

"And in the case of the earthquake in Japan," he says, "it seems to be the electrical grid which is the one network that is potentially affected by this, that could spread the negative impact of this event throughout the country, and generate a significant macroeconomic impact."

This is the big unknown in Japan. According to some estimates, about 7 percent of the nation's generating capacity has been lost so far. That might be manageable. But several nuclear power stations are still in major danger.

Beyond Japan, Szechenyi raises the question of how global production will be affected by the loss in Japan of one item in a supply chain.

"If you're manufacturing components in different places, and have to pull all of those together for final assembly," he says, "and some points in that chain are shut down, that can certainly have an impact."

The global auto industry could be affected by the earthquake. So could semiconductors, whose manufacture depends on extremely sensitive equipment. One plant in the quake-affected area, for example, makes processors that are essential for the graphics used in smart phones.

And the reconstruction effort in Japan could test the government's ability to borrow. Japan is already one of the most indebted countries in the world.

If nervous investors were now to dump some of that Japanese debt, the government could have a harder time financing a rebuilding effort. But Noland points out that much of the debt is held by Japanese, not foreign investors — something he says gives the government a bit more flexibility.

"I just don't see the average Japanese dumping government bonds," he says, "if the government says, 'We're going to spend a little extra money to rebuild northern Japan.'"

Of course, if those Japanese investors focus on their own country's needs, they may be less willing to finance U.S. debt. And that could drive up interest rates here a bit. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.