Japan Disaster Threatens Economic Recovery, Affects Economies Globally

The disaster in Japan threatens to significantly impede the nation's economic recovery, perhaps spreading to other nations, say economists.

The worst devastation from the earthquake and tsunami is concentrated in the northeast of Japan, but the economic effects of the earthquake and tsunami could expand further. On Tuesday, Japan's stock market took its worst dive since the fall of 2008. Global companies, such as Toyota, have halted significant portions of their output.

Already, collapsed nuclear plants are weakening Japan's energy supply, and power outages have hit manufacturers. With infrastructure and factories destroyed, major automotive and technology companies have frozen exports. As the world's economies still struggle to emerge from the recession, sectors that have been major drivers of global growth now face massive stalls.

The full impact of the disaster, and the extent to which it could harm economies globally, cannot yet be assessed, experts say. In economic terms, the tragedy might not have much effect on other countries, as companies compensate for devastated facilities, say economists. But even once the crisis subsides and Japan begins to rebuild, that country's economy could face major challenges.

"This is much, much more than a quarter's issue," said Robert Feldman, chief economist for Morgan Stanley in Japan, who spoke by phone from Tokyo. "It's a huge impact. We just don't have any idea of exactly how much the damage is."

Amid the massive devastation, experts see two emerging threats to the Japanese economy: the domestic power supply could be compromised, and manufacturing companies could be unable to export products.

Japan's nuclear reactors provide about a third of the country's power, and a fraction of those reactors have been incapacitated. On Monday, Tokyo Electric Power Company began to impose scheduled blackouts in an attempt to avoid unpredictable outages on a larger scale, according to a release from the company. A third reactor exploded Tuesday and a fourth caught fire.

"What really matters is how this thing plays out in terms of the electrical system. If they can manage that problem, then you're just talking about a horrible but nevertheless highly localized problem," said Marcus Noland, deputy director of the Peterson Institute for International Economics in Washington. "If this thing manages to propagate itself through the electrical system to the rest of the country, then there's a much greater degree of uncertainty."

Owing in part to this energy crisis, Japan's economic recovery will likely be delayed, according to a Sunday report from Nomura Securities in Tokyo. As panic gripped Japanese financial markets, the Nikkei stock index closed down nearly 11 percent Tuesday, its biggest plunge since October 2008. The Japanese economy won't recover from this disaster until the final quarter of 2011, Nomura predicts.

Wells Fargo projects that the growth in Japan's economic output, at an annualized rate, will be 0.3 percent for the second quarter of this year, according to Scott Anderson, a senior economist for the bank. That represents a full percentage point reduction from Wells Fargo's previous growth forecast over the same period.

Experts disagreed on how long the economic setback would last, but acknowledged that the challenges to the Japanese economy would be great.

"There's chaos," said Arthur Alexander, an economist at Georgetown who specializes in Japan. "That will affect things in the short run."

Key elements of Japan's manufacturing have frozen. Toyota, Honda and Nissan automobile plants in northern Japan have been closed. Nissan has said that nearly 2,300 Nissan and Infiniti vehicles awaiting shipment were destroyed by the tsunami that followed the 9.0-magnitude earthquake, according to a report from IHS Automotive.

Toyota has halted 45 percent of its global production, and plans to keep all its Japanese plants shuttered through Wednesday, according to the report. Nissan has reported damage to six of its Japanese facilities. Honda plans to keep several of its plants closed through March 20.

With shipping ports and roads destroyed, some companies are simply unable to export products. The automotive industry, which economists have hailed as a source of global economic growth, now faces a strain.

"Even if they could make the cars, they couldn't send them anywhere," Feldman said from Tokyo. "In a certain sense, Japan is very tough -- construction standards really saved a lot of people -- but we do have this distribution issue."

Devastation has also seized the technology sector. About 40 percent of the world's flash memory chips, used in devices ranging from cameras to computers, are made in Japan. A fifth of the world's semiconductors are made there. Already, Sony has shut down 10 factories and two research centers, according to Bloomberg News. Toshiba has shut down five of its plants. Texas Instruments has closed two plants and won't return to full production until July, according to Reuters.

The affected companies produce key components for computers, televisions, camcorders, DVD players and iPads. Now, the high-tech industry, which experts have seen as a key source of economic growth, contends with the prospect of a shortage.

"There will be individual companies in the U.S. that are not going to be able to get their supplies for anywhere from weeks to months," Alexander, the Georgetown economist, said. "There certainly will be suppliers who are either out of business or have lost their capabilities for the moment."

But even if these developments wound Japan's economy in the short term, the global consequences aren't likely to cause lasting economic damage, experts say. The Japanese economy, which is the world's third largest, has redundancy built in. When factories or power plants close, companies can turn to other facilities for supplies. Experts predicted that Japan's power grid, at least, would be restored within the next few weeks.

Before the earthquake, suppliers in Japan were using resources at a level that was 15 percent lower than before the financial crisis of 2008, according to a report from the research division of Macquarie Capital Securities. That means there is some ability to transfer production to other facilities.

The principally-affected region in the northeast of Japan accounts for about 4 percent of gross domestic product -- roughly equivalent to the output from the city of Kobe, which was hit by an earthquake in 1995. Experts say that the Kobe earthquake, though it temporarily devastated the local area, did not significantly harm larger economic trends.

"If you looked at the macro data, you wouldn't even know there was such a destructive earthquake in Kobe 16 years ago," said Richard Jerram, head of Asian economics at Macquarie Research, who spoke by phone from Singapore. "It recovered very, very quickly."

In terms of the magnitude of the earthquake, the current devastation is far worse than in 1995. But in economic terms, it won't significantly harm even the Japanese economy over the long term, experts say. The Japanese government has pledged various stimulus measures, and while the rebuilding process will be difficult, it's unlikely to cause lasting economic damage.

"It's a huge blow to the Japanese economy," said Mark Zandi, chief economist at Moody's Analytics. "But it should have a very temporary, modest impact on ours."