Visions - Spring 2011 - (Page 6)

THE VIEW FROM WASHINGTON Economic Aftershocks of Japan’s Multiple Crises Introduction: Japan’s Earthquake Will Not Derail Pre-existing Trends F irst and foremost, on their own, the Japanese earthquake, tsunami, and nuclear crisis are each enormous human tragedies of unimaginable scope. And while the world has been impressed with the resiliency of the Japanese people in the face of such distress, the extent of the suffering should prompt deep introspection in other exposed areas of the world about what more can be done to mitigate the effects of potential disasters in the future. Although both the earthquake and tsunami that hit Japan were of near unprecedented levels, most of the preliminary estimates of economic damage from the disasters seem to be in line with those of previous disasters in other advanced economies.According to economists from the Carnegie Endowment for International Peace, occurring in a geographic area that accounts for roughly 4% of Japan’s GDP damages , are estimated to range from $125 billion to $200 billion, or 2.5% to 4% of Japan’s GDP In aggregate, these figures are too . small to seriously damage the Japanese economy over the long-term or derail the global economic recovery; however, they will have a profound impact on the worst-affected communities, and a number of risks, particularly with regard to the still-unsettled situation at the Fukushima nuclear facility, could worsen outcomes considerably. If estimates of anticipated government reconstruction and relief are in line with the actual official response, then the earthquake and tsunami’s effect on GDP growth should be minimal. Japan’s growth will be smaller for a quarter or two, but public reconstruction efforts should stimulate demand and output by the end of 2011 and into 2012. Economists from Carnegie note that empirical evidence from the February 2010 earthquake in Chile lends support to the conclusion that a year from now, the change in Japan’s GDP level from pre-earthquake trends will likely be negligible.That manufacturing had returned to 98% of its pre-quake level 18 months after the Kobe earthquake in 1995 also lends support to this conclusion. With the impacted area responsible for less than one-third of one percent of global output, the effect of the disaster on the global economy should be small.While the initial reaction to the disaster in the financial markets reflects a natural tendency to overreact to uncertainty, the fluctuations do represent some concern regarding specific risks and unknowns, most notably with Fukushima. Over the medium term, three effects should be closely monitored for economic impact: (1) liquidity injections’ potential to influence inflation; (2) disruptions to the global supply chain as a result of the earthquake; and (3) the combination of the Japan crises and Middle East unrest on oil prices. Overview of the Japan Shock and Comparison With Other Crises While analysts from the Conference Board generally echo the views expressed by Carnegie, they caution that the extent of the damage to both the Japanese and world economies cannot truly be measured until the nuclear crisis is brought under control, past experience suggests that as bad as this natural disaster was, it may not have the force to seriously alter the direction of recovery trends that were already under way.While Japan may undergo an extended period of slower growth, similar to the global recession of 2008-2009, expansionary momentum had picked up in 2011 and export growth in Japan was also on the rise.And while the regional economy of the affected area will take longer to recover than the overall Japanese economy, if the damage from the nuclear crisis remains limited, leading economic indicators suggest that although the economy will slow, it should be able to avoid dipping back into recession. Tohoku Earthquake— Economic Summary • 1995 Kobe earthquake damages were estimated at 2% of GDP • Damages from the March 2011 disaster are estimated at 2.5% to 4% of GDP • One-fifth of Japan’s nuclear capacity has been closed • Industrial production will contract in the short-term and impact the supply chain • Industrial production recovery may outpace the recovery in power production capacity • Reconstruction efforts should boost growth; 1% of GDP was spent on rebuilding after Kobe • To provide liquidity, the Bank of Japan has raised the size of its asset purchase to 2% of GDP 6 v i s i o n s S p r i n g 2 0 1 1

Table of Contents for the Digital Edition of Visions - Spring 2011

Visions - Spring 2011
Contents
SCOA Foundation - Japan Relief and More
Economic Impacts of Multiple Crises in Japan
Building the World’s Largest Wind Farm
Erecting the Structure of a New Value Chain
Unique Machine Heralded for Contributions to Alaskan Economy

Visions - Spring 2011