A man reacts while looking at a stock price board in Tokyo Monday, March 14, 2011 as the Tokyo stock market plunged on its first business day after an earthquake and tsunami of epic proportions laid waste to cities along Japan's northeast coast. (Eugene Hoshiko/AP)

U.S. futures down, world markets flat after Japanese stocks plummet

Japanese stock markets fell more than six percent Monday as the country’s manufacturers shuttered plants to assess damage and deal with power shortages, and the nation wrestled with the impact of not only a natural disaster but lingering concerns about nuclear safety.

The Nikkei index of major Tokyo Stock Exchange companies fell sharply in the first full day since the earthquake and tsunami struck Friday.

Worldwide, markets showed a measured response. In the United States, early trading showed the Dow Jones industrial average down 0.5 percent; Standard & Poor’s down 0.5 percent; and the Nasdaq composite down 0.3 percent.

Morning trading in Europe showed a modest drop. In Asian markets outside of Japan, there were small gains in China, Hong Kong and South Korea, but drops in Taiwan, Singapore and Australia.

Analysts around the world will be watching closely to see how this new round of economic uncertainty is received by markets balancing a U.S. economic recovery with rising oil prices and other emerging risks. They warned that extended power disruptions or larger-than-expected damage to manufacturers could undercut a global economic recovery that was beginning to gain momentum. The crisis will challenge Japan’s financial system and energy infrastructure, as well as its capacity for dealing with a humanitarian disaster.

The first working day since the quake struck dawned to rolling blackouts and hoarding, despite the Bank of Japan’s vow to keep the economy--the third-largest in the world--on track. The central bank announced Monday that it will put a record $183.8 billion into the economy to keep the country’s financial system stable and its trading system functioning.

The insured property losses from the quake could amount to between $14 billion and $35 billion, according to Air Worldwide, a risk consulting company.

Japan is already groaning under government debt equal to twice its yearly economic output, proportionally the world’s largest load. But analysts said the country should have the financial muscle to deal with the reconstruction.

“Japan has the immediate fiscal space to respond to this tragedy,” said Mohamed El-Erian, chief executive officer of investment fund Pimco.

Although the cost of reconstruction may prove challenging. But analysts said Japan retains enough room to borrow what it will need to bounce back from the devastation without, for example, using nontraditional methods such as spending down its trillion-dollar stockpile of international currency reserves. Money is likely to also flow from Japanese investments overseas back to the country, a phenomenon that may have been behind the jump in the value of the yen Friday after the disaster.

The Tokyo exchange was open only half an hour longer after the earthquake struck but in those closing minutes dropped 1.7 percent. The weekend’s events are likely to shape trading worldwide amid expectations that problems at Japan’s nuclear facilities may prompt countries to rethink the use of nuclear power and boost demand — and prices — for oil and other fuels.

The country has lost about 6,800 megawatts of power-generating capacity after nuclear plants were damaged, perhaps 7 percent or more of its total supply, analysts with Barclays Capital said in a research note. But the effect on industry and economic activity won’t be clear until it is known how long the plants will be off line, how the lost power can be replaced, and whether potential radiation leaks at the nuclear facilities have been contained.

Japanese companies are just beginning to assess the damage. The twin natural disasters spared some of the country’s most important economic zones. But they have forced at least a temporary shut down of plants and businesses in the more heavily industrialized Tohoku region.

Toyota said many of its Japanese plants had been able to open Friday, but that four facilities, in Hokkaido, Tohoku, Miyagi and Iwate, would be at least temporarily shuttered while they were evaluated. Companies such as Honda and Canon released similar statements, with handfuls of facilities shut. But they had no clear sense of the extent of the damage and how long it will take to repair. There were no estimates of the impact on their operations or the ability to ship products because of damage to local roads and railways.

Those details will be important in determining whether the impact of what happened in Japan takes the typical course of other natural disasters: an immediate drop in economic activity followed by a more-than-offsetting gain as funds and investment flow to reconstruction. The impact could also pose larger risks to the Japanese and global economies.

Japan’s top corporations include major global brands that have moved production overseas. Some companies such as Honda have already projected that its operations in the critical North American market would not be greatly affected.

But the global impact could be unpredictable in an era when markets, investors and policymakers have become increasingly concerned about the way shocks in one country can ripple through the world in unexpected ways.

In its most recent detailed analysis of Japan, the International Monetary Fund said it was concerned that any disruption to Japan’s tentative return to economic growth could send the country into a deep deflationary spiral, with wages, prices and investment falling, and households and businesses reluctant to spend on the expectation that they will fall even more. Although Japan’s economy, with its aging population and stagnant incomes, is not a driving source of world demand for goods and services, it does play an important role in world trade. A renewed recession there could deal a broader blow to confidence in the recovery.

“A slow recovery carries risk that deflation and could become more entrenched,” the IMF concluded. It noted that public opinion in Japan, since 2007, had quickly been turning toward an expectation that prices would fall in the future.

At the same time, the IMF has been pressuring Japan on its government debt, and arguing that large and rising deficits — something that may now be unavoidable — were also a risk to growth.

At least in the short-run, “Japan’s tragedy will also impact other countries via temporary head winds in the form of lower global demand and interrupted supply chains,” El-Erian said.