Japan earthquake’s aftermath: Economists more pessimistic about long-term impact

March 18, 2011

The economic impact of the ongoing crisis in Japan may be deeper and longer-lived than initially thought, with the likelihood of protracted problems at a nuclear plant adding to a growing uncertainty, according to analysts and others who have been studying the issue.

In the first days after the natural disasters struck Japan, economists and others noted that such tragedies often follow a familiar pattern, with a downturn in economic activity followed by a surge in growth and investment during reconstruction that typically offsets the initial losses. With the damage focused on Japan’s less-intensely developed provinces, they said it would probably prove less costly than the 1995 earthquake that struck the industrial center of Kobe.

But a week later, with the country still battling to gain control of overheating nuclear reactors, transportation and electricity networks disrupted, and the scope of the damage becoming clearer, the impact is now expected to eclipse Kobe. Analysts said it is possible the consequences will be felt around the world in the form of higher inflation, slower growth, or a potential shock to the financial system.

Global stock markets rose Friday as a possible cease-fire in Libya and action by the Unites States and other major nations to stabilize the value of Japan’s currency calmed some of the more immediate fears. The Dow Jones industrial average closed up 83 points, at 11,858, a gain of 0.7 percent.

European and Japanese exchanges also rose in the wake of the move by the Group of 7 industrialized nations to ensure the value of the Japanese yen does not fluctuate too dramatically.

But that rare move into currency markets by nations that typically oppose such action was a sign that the crisis is moving into uncharted territory. While Japan is not a major source of worldwide demand for other countries’ products, its global corporations and banks are heavily invested around the world and woven into the fabric of the global economy. The deepening sense of crisis in the country has begun to raise more complex questions — such as, what happens if a major industrialized country loses a portion of its power grid for an extended period of time, or, in the worst case, loses a portion of its land and capital base to contamination?

Damage and other economic estimates “could change substantially for the worse if the Fukushima nuclear reactor problems are not brought under control,” analysts at Dutch bank ING wrote in a research paper. “We may be already witnessing a descent into nuclear catastrophe.”

U.S. officials said the chief unknowns at this point involve the outcome of the nuclear reactor crisis, how long that might delay the start of reconstruction, and whether it leaves the country inspired to rebuild or shaken and hesitant to invest.

Estimates of the building and structural damage from the earthquake and tsunami have grown to upwards of $130 billion, rivaling Hurricane Katrina as the most costly natural disaster on record, analysts from Barclays Capital wrote this week.

“The sheer complexity of the damage makes it difficult to grasp the overall impact,” Barclays analysts Kyohei Morita and Yuichiro Nagai said, estimating that lost exports, lowered consumption and other impacts would raise the total cost of the earthquake and tsunami to around $210 billion.

Other ripple effects are starting to be felt around the world. General Motors, for example, said it would shut down a Shreveport, La., production line next week because of a shortage of parts from Japan, one of the world’s central supply hubs for the automobile and technology industries. Toyota said it was curbing overtime at its 13 North American plants to conserve its inventory of parts, cutting into U.S. incomes.

The financial system may also be at risk. With hundreds of thousands of people displaced by the natural disasters and the evacuations around the nuclear plant, “none of these people are going to be writing their mortgage checks today or paying off their credit card bills, business lines of credit, export lines of credit or car loans,” Carl Weinberg, chief economist for the High Frequency Economics consulting firm, wrote this week. “The banking sector could fail.”

The problems in Japan could also add to global inflation, sharpening the dilemma already faced in Europe and the United States over whether to raise interest rates to curb rising prices, even though that might crimp economic growth.

Oil prices declined Friday after Libya announced a cease-fire. But the nuclear crisis in Japan could make the country, and some others, more dependent on oil and natural gas — and push up prices in coming months. Analysts at ING noted that the flooding of farmland with seawater might force Japan to import more food at a time when world food prices are already near record highs, while the disruption to global supply networks could make a host of manufactured goods more expensive.

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