Money Matters - Simplified

Japan quake disaster may hit global business

The country is among the major exporter of automobiles, industrial equipment and consumer electronics. It also consumes vast quantities of petroleum, agricultural and luxury consumer products.

While the devastation caused by the earthquake in Japan is still being assessed, economists have already expressed fears that the disaster in Japan could affect the businesses throughout the world with the most impact on the automobile, machine tools and electronics sector.

After the 9.0 magnitude earthquake, many manufacturers have slowed or shut down production owing to power shortage, interruptions in the supply chain, and transportation problems.

Production hit in Japan
At present many manufacturers of the country including Toyota, Toshiba and Sony have been forced to shut down production at their plants.

The country is among the major exporter of automobiles, industrial equipment and consumer electronics. It also consumes vast quantities of petroleum, agricultural and luxury consumer products.

The speed of recovery depends largely on the pace of restoration of energy supply. At present one fifth of the country’s nuclear power plants are shut down. Japan’s industry relies heavily on electricity and more than 30 percent of electricity comes from these power plants.

The plants are expected to resume production soon but it remains to be seen what will be the effect of the catastrophe on the Japan's economy and global economy as a whole.

Some analysts have predicted that the reconstruction cost can exceed $100 billion.

Japanese economy was already burdened with constant deflation, decreasing foreign investment and huge borrowings. The challenges that lie ahead now are far greater than earlier. Analysts are almost certain that the country will have to borrow more for the reconstruction process.

Marcus Noland, Sr. Fellow at the Peterson Institute and expert on Asian economies, said that Japan “is starting from a lousy fiscal position. If this can be contained, the economic implications may not be long term. If not then it could have implications not only for Japan but for the global economy.”

Noland compared the situation with that after the 1995 Kobe earthquake which hit the much more industrialized area of the country but the risk of large scale disruptions was less as the utilities were not hit badly at that time.

Economic recovery depends largely on energy
The speed of recovery depends largely on the pace of restoration of energy supply. At present one fifth of the country’s nuclear power plants are shut down. Japan’s industry relies heavily on electricity and more than 30 percent of electricity comes from these power plants.

The industry also relies on fossil fuels but data released by an energy information company claims that more than 30 percent of the refining capacity of Japan is either shut down or reduced. Even the utilities are enforcing blackouts to deal with the energy shortage.

The disruption in the auto sector could affect brands all over the world as often car makers depend on intricate global supply chains. For example it is not uncommon for Chevrolet manufactured in Michigan to use components made Japan.

Rebecca Lindland from IHS Global Insight pointed that, “no body works in isolation these days. All it takes is one missing part. If you’re missing something as simple as the cup holder, you aren’t selling that car.”