Analysis: Quake to hit Japan economy, caution about rebound

NEW YORK Sun Mar 13, 2011 8:31am EDT

NEW YORK (Reuters) - Japan will suffer an economic hit from Friday's devastating earthquake and tsunami and then get a boost from reconstruction, but forecasts are increasingly cautious as the scale of the disaster emerges.

Japan bounced back from its last massive natural disaster, a 1995 earthquake that wrecked the key port of Kobe. But the new calamity, which entailed devastation by a mammoth wall of water, has happened at a time when Japan's economy is much weaker than in 1995.

Japan is also now weighed down by the largest public debt among advanced economies, double the size of its $5 trillion gross domestic product.

Added to which, the full-scale and consequences of a disaster Prime Minister Naoto Kan has declared the biggest since World War II, are growing as details of the devastation become apparent.

Media reports said the death toll could rise to 10,000. Almost two million households are without power and about 1.4 million are without running water.

Engineers are fighting to avert a disastrous meltdown at a nuclear plant following the disaster.

"There are so many uncertain factors such as the number of casualties and missing, so I still can't figure out how extensive the damage will turn out to be and how it will impact on the overall economy's growth," said Kyohei Morita, chief economist Japan for Barclays Capital.

Most economists suggested the economy would slow down in April through June before picking up again as reconstruction activity kicks in.

But an accident at the Fukushima nuclear power plant owned by Tokyo Electric Power Co added a new dimension. Authorities have evacuated 140,000 people from around the plant and leaked radiation to bring the reactor back under control in the worst nuclear accident since the Chernobyl disaster in 1986.

"Not since the Cold War have I been asked to think about the economic consequences of a nuclear explosion in a densely populated area in a modern industrial economy," said Carl Weinberg, chief economist at High Frequency Economics.

"I don't relish that task."

PRE-QUAKE STRUGGLING

Japan's economy was already struggling before the disaster.

Its gross domestic product shrank by an annualized 1.3 percent in the fourth quarter of 2010. A Reuters poll published before the quake showed economists expected GDP to resume growing in the first quarter, expanding by 0.5 percent from the previous quarter.

Many analysts said while the economy might not return to growth in the first quarter, it will pull through by the end of the year.

Takahide Kiuchi, chief economist at Nomura Securities in Tokyo, said on Sunday that Japan's growth rate will be hit harder by this disaster than it was by the Kobe quake.

Kiuchi said that production "may slump longer this time than after the Kobe quake. But it will still be for just several months." He also said "we don't think the economy will falter."

As for the world economy, Japan is not a major engine of global growth so the disaster poses less of a risk to other countries than soaring oil prices caused by turmoil in the Middle East and North Africa.

"The global economy will be fine," said Stephen Stanley, chief economist at Pierpont Securities in Stamford, Connecticut.

Some are more optimistic than Kiuchi about the push that rebuilding northeastern Japan should provide.

"After an initial decline in GDP growth, (Japan's) economic activity will rise driven by reconstruction," said Mohamed El-Erian, who helps oversee more than $1.1 trillion in investments at PIMCO.

Japan might see GDP expand by more than 3 percent in annualized terms over the next three quarters if the pattern seen from the smaller 7.2 magnitude Kobe earthquake is anything to go by, analysts said.

Friday's quake, which sent a tsunami surging through coastal towns and cities, was centered around the northeastern city of Sendai in a region that is home to auto manufacturing and semiconductor factories.

MORE DEBT

One of the most worrying impacts of the earthquake will be Japan's already fragile debt position.

"The timing of the disaster could not have been much worse," Capital Economics said in a research note.

"A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control," it said.

Brendan Brown, economist at Mitsubishi UFJ Securities, said it "seems plausible" that the debt costs could add between 2 percent to 10 percent of GDP to its massive public debt load.

If public debt grows more than 5 percent, "there would be the speculation as to whether the Japanese government would dip into its massive holdings of foreign exchange reserves and, say, sell U.S. T-bonds rather than issuing huge additional quantities of JGBs," Brown said.

It is unimaginable that Japan would restructure its debt but investors might expect higher inflation and a weaker yen as ways to help it to cope with its debt burden, he said.

This could hit its credit rating again. Japan was downgraded by Standard & Poor's in January given the lack of a plan to fix public finances and Moody's has warned it may do the same.

STRONGER YEN

The yen, which jumped more than 1 percent to 81.87 per dollar following the quake on Friday, likely will gain further in the following days, depending on the size of repatriation from insurers and other companies.

The Bank of Japan on Sunday said it had extended a total of 55 billion yen to 13 financial institutions in the quake-struck northeast since Saturday to help them secure enough funds to meet deposit withdrawals.

On Monday, the BOJ holds a one-day policy meeting and will pledge to supply as much money as needed to keep the calamity from destabilizing markets and its banking system.

"We expect that the foreign exchange market will take its cues from the immediate monetary and fiscal response," Citigroup analysts said in report.

Another intervention by the BOJ in the currency market to curb yen strength is a possibility, said Mansoor Mohi-uddin, head of foreign exchange strategy at UBS Macro Research.

"We don't expect USD/JPY to break through 80," he said in a research note. "Instead we think the Ministry of Finance would follow up its action of September last year by instructing the Bank of Japan to intervene in the currency markets again." (Additional reporting by Jennifer Ablan and Kristina Cooke; Editing by Bill Trott and Richard Borsuk)

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Comments (2)
ECOPOLITICS wrote:
Large areas of northeastern Japan are a wasteland after the country’s strongest earthquake on record triggered powerful tsunami wave. The combined destruction of quake and tsunami flooding have killed hundreds and forced tens of thousands of people from their homes and workplaces. Hundreds of towns and villages in Japan’s northeast were devastated by the 8.9 magnitude quake that was centered 100 miles off the area’s Pacific coast. A tsunami wave 23 ft. high washed six miles inland, and receded to leave massive flooding, deaths and building destruction.

Japan, one of the world’s top three economies, operates 55 nuclear power plants – 11 now shutdown due to the quake, five others placed on critical containment status, and the Fukushima reactor idled with a ruptured containment capsule releasing deadly radioactive gases, particles and debris. The unpredictable natural disaster of an earthquake in Japan has caused a nuclear power plant to fail, and release radioactive materials that are toxic for 300 to 3,000 years in the environment.

The 1986 nuclear reactor accident at Chernobyl in Ukraine spread radioactivity and death over eastern Europe and despair in the Western world’s nuclear power industry. Chernobyl, along with the non-lethal accident at Three Mile Island in Pennsylvania in 1979, sent the industry into decades of decline.

Enviro-groups will predictably leverage the new enviro-hysteria of “Fukushima” to stop the expansion of nuclear power in America. Just as they have used the examples of Chernobyl and Three Mile Island as pejoratives against the U.S.’s current 104 nuclear power plants that provide about 18% of our electricity. Nuclear power expansion is necessary in America for economic, security and environmental reasons. The energy from one pound of uranium is equivalent to 1.3 million pounds of coal energy. Nuclear power produces none of the greenhouse gases associated with global warming.

Just as the “green screams” of “BP” demonized our oil production and oil independence, listen for the next enviro-groups’ rallying cries of “Fukushima” to demonize our nuclear energy production and energy independence.

Mar 13, 2011 11:44am EDT  --  Report as abuse
Skylor wrote:
Its too bad radiation kills or sickens many exposed to it. I rather have global warming.

Mar 13, 2011 12:57pm EDT  --  Report as abuse
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