Strategic Briefing | 3.14.2011 | Economic Blowback From Japan

Analysis: Japan quake risks severe near-term economic damage
Reuters | Mar 14
A triple blow of earthquake, tsunami and one of Japan’s worst nuclear accidents is set to damage the world’s third largest economy, possibly more deeply and for longer than initially expected. Power outages and possible tax rises are likely to hurt companies and households and could outweigh the mild economic aftershock from the 1995 Kobe earthquake, given that oil prices and the yen are stronger and Japan’s debt pile is much bigger.

Supply Disruptions of Power and Water Threaten Japan’s Economy
New York Times | Mar 14
As the humanitarian and nuclear crises in Japan escalated after the devastating earthquake and tsunami, the impact on the country’s economy appeared to be spreading as well… “The big question is whether this will seriously affect Japan’s ability to produce goods for any extended period of time,” said Edward Yardeni, an independent economist and investment strategist. The bleak outlook prompted a 6.2 percent plunge in the Nikkei 225 stock index in Tokyo on Monday, as companies from Sony to Fujitsu to Toyota scaled back operations. The Bank of Japan, in an effort to preempt a further deterioration in the economy, eased monetary policy on Monday by expanding an asset buying program. ‘‘The damage of the earthquake has been geographically widespread, and thus, for the time being, production is likely to decline and there is also concern that the sentiment of firms and households might deteriorate,’’ the central bank said in a statement.
Quake to Test Japan’s Economy, Markets
Wall Street Journal | Mar 14
The major factor in oil markets, 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 shut 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 barrels.
Japan Adds $183 Billion to Economy, Doubles Asset Purchases
Bloomberg | Mar 14
The Bank of Japan poured a record amount of cash into the financial system and doubled the size of its asset-purchase plan to shield the economy from the effects of the nation’s strongest earthquake on record… Policy makers said they were concerned corporate and household sentiment will worsen, with production set to decline in the aftermath of the temblor and an ensuing tsunami. The March 11 catastrophe killed an estimated number of more than 10,000 people, shut down factories, prompted rolling power cuts and sparked the risk of a meltdown at a nuclear power plant. “The disaster will push down gross domestic product in the short run, and the BOJ wants to mitigate the deflationary impact through liquidity injections,” said Tomo Kinoshita, a Hong Kong-based economist at Nomura Holdings Inc.
Oil below $99 as Japan disaster stuns economy
Washington Post | Mar 14
Oil prices dropped below $99 a barrel Monday in Asia after a massive earthquake and tsunami devastated northeastern Japan, likely denting demand for crude from the world’s third-largest economy… “This disaster has in effect temporarily frozen the world’s third largest economy,” said Richard Soultanian of NUS Consulting. “It seems clear that Japan’s appetite for crude oil may be diminished in the near-term which should provide previously unforeseen slack in international oil markets.”
Japan quake may be world’s costliest disaster
CNN | Mar 14
The disaster comes at a difficult time for the fragile Japanese economy, which slipped to the world’s third largest behind China in 2010. Japan’s export-driven business was hit by the financial crisis and a strong yen, which hurt profits from sales abroad. The rebuilding from the quake also will add to Japan’s towering load of public debt; it is nearly twice the size of its total GDP and the highest in the developed world. S&P downgraded Japan’s long-term credit ratings in January, citing its high fiscal deficits.
Japan Disaster May Have Global Economic Impact
NPR | Mar 13
Japan’s economy — like much of the world — was already facing serious challenges before the earthquake struck. Economist Robert Madsen, a senior fellow at MIT’s Center for International Studies, discusses the effects of the disaster in Japan on the economy there and around the globe…
Mr. ROBERT MADSEN: 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. 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.