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Impact of Quake on Japanese Economic Recovery

Until Friday afternoon, the biggest risk facing Japanese economic recovery was the sky-high oil price and the disability of export demand, as well as the hesitant government and the upcoming showdown on the budget iue by the increasingly bold oppositions.Today an ever-powerful earthquake heavily struck the coast of Miyagi region in northeastern Japan.It is a shocking event that reminds people of some more basic risks that may threaten the economies of the densely-populated and seismically vulnerable Japanese archipelago.It takes time to comprehensively evaluate the impact of this natural disaster.On Friday, officials and rescue agencies could still hardly measure the extent of damages and casualties in affected areas.However, this earthquake may at least pose a big question mark to Japanese economic recovery—economist had expected that Japanese economy might recover at a faster speed in the current quarter after stalling in the last three quarters of 2010.Last year, Japanese economy achieved an increase of 3.9%, the fastest growth rate in the past two decades.However, its current GDP is still far lower than that before the global financial crisis.Compared with the past three months, its GDP of the last quarter in 2010 had indeed decreased by 0.3%

The impact of earthquake on the major economies tends to be le serious than initially expected.Moreover, the most severely-affected regions on Friday are not as important as the coastal industrial zone of the Kansai region, which suffered large-scale regional disruption after the Kobe earthquake in 1995.Richard Jerram, Macquarie Group’s chief economist in Asia, said the entire northeast region accounts for about 8% of Japanese GDP, while the single Kobe City accounts for 4%.Neverthele, the disaster may deepen the worries of consumers and investors on the sustainability of Japan's economic recovery while Japanese economy is trying to get out the most serious post-war receion.Japan's GDP growth remains heavily dependent on the U.S., Europe and China and other key market demand, which indicates its economic recovery, has been subject to the overseas situations.“People are worrying that the vulnerable economic cycle cannot afford the severe damages.” Jerram said.Witneing the crane on the construction site nearby his office area stooped like a tree in the storm, Masaaki Kanno, JP Morgan’s chief economist in Japan, rushed out a study briefly listing some effects that might occur immediately.“It seems to take some time for the entire transport and distribution system to resume normal operation, “ said Masaaki Kanno, ”Commercial activities, particularly those in the Northeast will be damaged.“

In some convenience store in Tokyo, food shelves are almost empty, which implies the consumption of food and neceities may soar significantly in the densely populated areas near the capital in the short term.Also, it may lead people to reduce some non-eential needs such as tourism.At least, compared with 1995, Japanese companies should have better prepared to cope with the inevitable supply chain disruptions

Drawing on the leons of the disaster in 1995, the Japanese government and insurance

companies have been actively encouraged each company(even some small enterprises)to develop detailed ”Busine Contingency Plans“ , which aim to reduce loes as much as poible and help them quickly recover.In the long run, this earthquake will inevitably lead to affected areas’ maive investment in the architecture and public construction works.The horrible scene in which the whole building was swept away by tsunami indicates great effort and large investments in dealing with damages incurred.By forcing families and businees to spend their own savings financing reconstruction, the disaster may provide support for economic growth in the rest of the year.Before that, the ruling Democratic Party was committed to shifting spending ”from the concrete to the people “ in order to reduce the budget for public construction projects in favor of increasing child allowances and improving social welfare.All these measures made Japanese construction industry severely crushed.But now, the Northeast region will need more concrete, which is a good news for contractors under great preure.However, the demand for financing public construction works in affected areas will put more preure on the government budget.In the 2011 fiscal year, the Japanese government is bound to become more dependent on the revenues generated by new bonds(not taxes)to be iued for the third consecutive year.Although the quake will no doubt ensure that the Government and the opposition to reach a compromise on the legislation required to implement the budget-that reduces a source of uncertainty-but this may at least make Japan slow down in balancing its accounts, and thus guarantee actions to preserve its financial viability.Capital Economics, a research institution said, ”financial markets must also consider the economic costs of this disaster and the impact on public finance, which would be enormous."

Quake-stricken Japan

Objectively speaking, Japan is probably more capable than almost any other country to respond to the earthquake and tsunami last week.Despite heavy casualties, the consequence of nuclear accidents is also quite terrible.But economically speaking, the situation in Japan is almost worse to the extreme.First, the disaster has pushed the already over-valued yen exchange rate, either because investors and insurance companies are conducting the repatriation of funds, or because some people else bet they will.Experiencing power outage and flooded plants, exporters will have to face the declining price competitivene of their products.Second, the Bank of Japan’s ability to save the economy is limited.After the earthquake of Christchurch in New Zealand, New Zealand Central Bank cut interest rate by 50 basis points, while Japan's interest rate has been zero.Bank of Japan may(actually will)increase its aet purchases and intervene in currency markets to prevent the over-appreciation of the yen, even though the effect did not last long when it adopted the latter measure last time.Third, the Japanese government will need to rebuild the affected areas.After the 1995 Kobe earthquake, the Japanese government spent 3% of the gro domestic product(GDP)to counter the disaster.In theory, this should bring a useful short-term boost to Japanese in-deflation economy(Any GDP growth will come from any replacement of lost aets, so it should not be overemphasized.)But Japan is already the most indebted in all developed countries with every national saddled with average 5.2 million yen in debt.Therefore, Japanese government should reduce rather than increase spending.But Japan still harbors a glimmer of hope.This extraordinary event will at least lead rival politicians of Japan to put down divergences and work together to figure out a budget.In addition, As 94.5% of Japan's government bonds were sold to domestic investors, the spread of risk should be limited;As long as Japanese investors do not feel panic about the domestic financial situation, it counts little whether some other places in the world feel panic or not.Japan is able to overcome this terrible tragedy on the condition that its economic, political and social dimensions are consistently united.