In The News

Economic Impacts Across Asia from Japan’s Disaster

April 13, 2011

One month after the devastating earthquake and tsunami struck Japan, the Japanese are still coping with an incredible accumulation of sorrow, devastation, and anxiety about the future. Beyond the most urgent question of how Japan will recover from such a calamitous situation, a secondary concern is the potential human, environmental, and economic impact the crisis will have on the rest of Asia.

Effects of Japan earthquake and tsunami

One month after the Japan earthquake and tsunami, the Japanese are still coping with an incredible accumulation of sorrow, devastation, and anxiety about the future. Photo courtesy of U.S. Navy.

It is difficult and certainly too early to determine the full impact of Japan’s triple trauma – an earthquake, tsunami, and ongoing nuclear disaster. While the World Bank estimates the financial cost of the earthquake and tsunami at $235 billion, the human and economic consequences of a possible nuclear catastrophe is still hanging in the air, for both Japan and its Asian neighbors, like the sword of Damocles.

Economists seem to agree that the disaster is not likely to pose a significant, long-term risk to the global economy. It is, however, likely that Asia, and more particularly East Asia, will feel the economic aftershocks of Japan’s earthquake in both the short and the long term. The World Bank’s chief regional economist, Vikram Nehru, said that in the immediate future, the major impact of the disaster on Asia will be in terms of trade and finance. Indeed, several economic and financial dynamics may be affected:

  • Trade between Japan and other Asian countries has already been affected by both the reduction of exports from Japan due to disrupted supply chains (in the automotive and electronic industry, for example) and mistrust of consumers regarding fresh produce such as vegetables and fish. Several countries, including China, Russia, and Egypt, have already banned imports of fresh produce from Japan.
  • The destruction of industrial sites, electricity lines, roads, and harbors has halted production in Japanese factories like Toyota and Sony, disrupting trade. In some cases, however, this disruption may in the mid term be an opportunity for Asian countries like Korea and China to position themselves as alternatives to Japanese exports.
  • Finding alternative sources for specific, highly technical Japanese-made products like automotive parts and memory chips (36 percent of the world’s memory chips are produced by Japan) will not be easy. Some automotive assembly lines in Thailand and Korea are already experiencing shortages of parts from Japan and may have to reduce their production.
  • Food exports to Japan will also increase dramatically. Natural disasters have a tendency to cause volatility in global commodity markets in the near term. In the present case, this volatility will certainly be exacerbated by potential radiation risks in products from affected areas. The region of North Tohoku affected by the nuclear pollution is Japan’s fourth-largest food provider, producing about 20 percent of the country’s rice and a major portion of beef, poultry, and pork. The demand for agricultural products will create opportunities for countries like Vietnam, Thailand, and Cambodia.
  • In the mid term, reconstruction efforts in Japan will boost exports of construction materials from neighboring economies. However, if increased demand from Japan boosts exports from Asian countries, it will certainly increase the risk of inflation in a region that is already coping with immense pressures on food prices, energy, and basic commodities.
  • Drastic reduction of Japanese tourists visiting Asia. Not surprisingly, tourism, one of the most sensitive economic sectors, has been one of the first to show signs of contraction. Some countries, such as Cambodia and Thailand, have already felt the decline of Japanese tourism. In Cambodia, government officials and tourist professionals fear a drop of about 30 percent in March. Although unlikely to be significant in the long term, the number of Japanese visitors to East Asia has dropped since March 11, as Japanese business people and tourists postpone travel to focus on problems at home.
  • One unexpected outcome of the disaster may be a larger incentive for regional cooperation and trade. In this regional dynamic, we may see the regional political and economic power shift to benefit China (which overtook Japan as the world’s second-biggest economy last year).
  • Long-term reconstruction efforts will put a drag on Japan’s public and private finance with some potential impact on several Asian countries. Rebuilding homes, factories, roads, and bridges will require an important financial commitment that Japan will need to finance through more private and public debt. The current national budget for reconstruction is estimated at $12 billion but will likely rise.
  • How the inevitable public debt will be financed is a looming question. Will China play in Japan the refinancing role it is now playing in some European countries struggling with public deficits? This is actually unlikely. Although Japan’s debt is generally considered very high (more than 200 percent of GDP), much of it is intra-governmental (the government debt in one public agency is an asset of another). The Japan central bank also holds a large amount of financial earning assets (such as foreign currency assets for about 20 percent of GDP), non-financial earning assets, and non-earning public assets, which can favorably counterbalance the total value of Japan’s net liabilities. This implies that the Japanese government’s capacity to engage in important reconstruction spending is certainly higher than is often mentioned in the media.
  • A probable outcome of investment needs within Japan will likely be a slow-down in Japanese investments abroad. Japanese foreign direct investments in Asia will most likely slow down in the short term as potential investors delay their investment decisions. Countries like Cambodia that were expecting an important increase of Japanese investments in the manufacturing sector and the agro-industry may have to wait longer for this to happen. However, it may not be too long before Japanese entrepreneurs seize new opportunities to diversify risks and rebuild production sites into low-technology assembly plants.

Japan’s tragic nuclear disaster will most certainly have unexpected long-term impact. However, on almost all accounts, the disaster’s potential impact on Asia will likely be short and mid term. The reconstruction efforts may take longer than after the Kobe earthquake in 1995, but to believe that this unprecedented disaster will weaken Japan in the long term would be discounting the resilience and innovative capacity of the Japanese people.

Note: To assist recovery efforts, The Asia Foundation’s Give2Asia launched the Japan Earthquake and Tsunami Fund. Visit Give2Asia’s website for more information on how to help.

Véronique Salze-Lozac’h is The Asia Foundation’s regional director for Economic programs based in Cambodia. She can be reached at VSalze-Lozach@asiafound.org.

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