Japan’s 2011 Earthquake and Tsunami: Economic Effects and Implications for the United States

Global Economic Impact of the Japanese Earthquake, Tsunami, and Nuclear Disaster
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In the cities, many street lights, neon signs, and hallway lights have been switched off. This contributes to the somber pall that has been cast over urban life. In recent decades, Japan's growth rate has lagged behind that of the world, so it has not been a major contributor to global economic growth. The net impact of the disaster on global GDP, therefore, is expected to be relatively small minus about one-half a percentage point with about half of that effect confined to Japan, itself. Underlying map from U.

Casualty and damage data from Japan, National Police Agency. Tourist arrivals from Japan also are expected to fall as will the number of Americans visiting Japan. In the medium term, a slowdown in growth in Japan is likely to reduce U. If imports of certain products from Japan become scarce, China, South Korea, or other nations may gain at Japan's expense. Trade data for Japan are presented in the Appendix to this report. Currently, it appears that radioactive contamination of seafood from the recent nuclear disaster in Japan is not a food safety problem for consumers in the United States.

Food and Drug Administration has banned imports of spinach and kakina from the four Japanese prefectures of Fukushima, Ibaraki, Tochigi, and Gunma and milk from Fukushima prefecture only.

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For example, Ford Motor Co. Japan and the United States remain important trading partners to one another; however, their relative importance has declined over the years as other trading partners have increased their importance. More information about this report can be viewed below. The damage from the earthquake and tsunami is being compounded by the evacuations and uncertainty from the problems at the Fukushima nuclear reactors. At many Chinese ports, Japanese ships with food cargo are being denied customs inspections. Japanese auto manufacturers have also been adversely affected by disruption of operations of parts suppliers. A Toshiba plant making liquid crystal displays was damaged.

All milk and milk products and vegetables and fruits produced or manufactured from the four Japanese prefectures affected are to be detained upon entry into the United States and not allowed to enter the U. Some have banned food from the prefectures most affected. At many Chinese ports, Japanese ships with food cargo are being denied customs inspections. International shipping companies reportedly are charging higher rates for calling at Japanese ports. The debris washed out to sea from the tsunami is being picked up by Pacific Ocean currents and is projected to spread eastward from Japan and in about three years likely will reach the U.

If so, this would wash debris onto California beaches and the beaches of British Columbia, Alaska, and Baja California. The value of the yen has been increasing, prompting coordinated intervention by the G-7 countries Group of Seven Industrial nations to halt excessive yen appreciation. A repatriation of assets back to Japan may put upward pressure both on the yen and on U. Treasury and other securities, but analysts expect that over time eventually the damage from the disaster will weaken the yen.

The questions going forward include whether Japan's debt burden will leave it unable to secure the funds needed for rebuilding; whether the disaster has fundamentally altered the Japanese economy and the competitive position of its industries relative to those in China, South Korea, and other nations; what the impact will be on energy markets and the nuclear industry in Japan and the world; how Japan and other countries should cope with large inflows of "hot money" that can distort exchange rates; whether global supply chains can adjust to the loss of supply from Japan; and how quickly Japan can regain its economic activity and rebuild its capital stock.

Since Japan has a history of severe earthquakes, its citizens and companies have made considerable preparations and have recovered from previous disasters.

The January Kobe earthquake 6. The immediate effect was a contraction in Japan's economy of 2. The direct damage from Japan's earthquake and tsunami has been concentrated in the northern region of the country, some distance from Japan's industrial heartland. The financial and economic effects, however, are spreading through the Japanese economy, the East Asian region, and also may affect businesses and consumers in the United States. The effect of the record 9. As shown in Figure 4 , the tsunami also destroyed or damaged aquaculture facilities in prefectures quite distant from the epicenter.

The damage, furthermore, has been compounded by the nuclear contamination from the Fukushima Daiichi Nuclear Plant plus a shortage of gasoline and of electricity that has caused rolling blackouts in Japan's industrial centers. In mid-April, Japan's oil refining capacity was basically restored. Japan's economic growth, already anemic because of the global recession in , is expected to drop into negative territory for a quarter or two but turn positive again as the crisis passes and rebuilding commences. As the extent of the damage becomes more apparent, forecasts for Japan's economic growth are becoming more and more pessimistic.

Initial expectations were that the disaster would shave 0. Japan—Interim Quarterly Forecast, updated April 14, Typically, the negative effects of a natural disaster are large immediately after the event and are mostly concentrated in the region of the disaster.

In addition to the nuclear plants destroyed, other generating plants are expected to remain offline until repairs are made and safety ensured. Of Tokyo Electric Power Company's 17 nuclear reactors, 13 are currently off line as are 4 nuclear plants belonging to another company servicing the same region. Even the plants not damaged extensively are not expected to come back on line until after August This has caused serious shortages of electricity in northeastern Japan that still remain despite the darkened street lights in Tokyo, more self-generating capacity being installed in factories, a rush on purchases of solar cells, and emergency generating capacity being shipped in from other countries.

Japan's situation also is unusual because when the first electrical generators were imported, the German generators installed in Tokyo and points east produced electricity of 50 hertz while the American generators in Kyoto and west produced current of 60 hertz. Presently, only 1, megawatts exist in capacity to convert the electricity in the west to that in the east. While the visual images mainly have been of the tsunami and its aftermath, the earthquake also damaged plants and equipment far from its epicenter.

Port facilities, 17 sensitive electronic equipment, 3, roads, and 71 bridges also were harmed. In addition to the casualties, the toll on life also has been great. An estimated , people have been evacuated from the affected areas and , people were still living in evacuation shelters as of May 10, The 6, homes still standing after the quake and tsunami but without electricity are expected to have power restored by the end of May, and 77, homes are still without water as of May 6.

Japan's Earthquake and Tsunami: Economic Effects and Implications for the U.S.. Congressional Research Service. Summary. The March. Download Citation on ResearchGate | Japan's Earthquake and Tsunami: Economic Effects and Implications for the United States | The March 11,

The city of Sendai, with a population of roughly 1 million, is in the middle of an agricultural region, but it still has a considerable number of industrial facilities. The villages most damaged by the tsunami were engaged primarily in fishing, but manufacturing accounts for about a quarter of production in the region, 20 and plants in the most severely damaged areas supply parts and products used in manufacturing elsewhere in Japan. As of March 16, , all 12 automakers in Japan reportedly had temporarily stopped production at some plants.

Companies such as Hitachi equipment for power plants , Renesas Electronics semiconductors , NEC electronics , Sony electronics , and Fujitsu computers also had suspended operations at certain plants in the affected area. As of March 25, Japanese oil refiners had restored capacity in three of the six refineries that had halted production.

However, since other refineries had been operating at below capacity, some production is expected to be covered by other plants. It has added new uncertainty to markets already under stress. The first effects have been financial as values on stock markets dropped and paper values shrunk. Equity markets, however, have been recovering as the impact of a disaster is factored into risk calculations and the economic effects become more clear.

Still the situation in Japan has added to instability in financial markets in the United States and the world. The value of the yen and interest rates also are being affected. Investors, hedge funds, and speculators have bought yen in anticipation that Japan's wealth holders, insurance companies, and possibly the government will have to repatriate overseas investments in order to finance insurance payouts and rebuilding. The value of the yen This decision was made by monetary authorities in Japan, the United States, the eurozone, Canada, and Britain. Japan's Ministry of Finance has argued that Japan's life and casualty insurers already have secured considerable funding and intend to tap domestic markets rather than repatriating funds from overseas and that the strength of the yen was due to speculation.

In addition, since China's yuan has been linked closely to the value of the dollar, Chinese exporters are likely to gain further price competitiveness relative to those from Japan. Approximately a quarter of developing East Asia's long-term debt is denominated in yen. Another question deals with the impact on U. Japanese investors are major private foreign holders of U.

Treasury securities that finance the U. At one time, Japanese investors were the largest foreign holders of U. Some analysts have suggested that Japanese private and government investors in U. Treasury securities may have to slow down or diminish their holdings to finance reconstruction operations in Japan.

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Such a move could increase the interest rates that the U. Other analysts have suggested such an impact would be limited as Japan should have sufficient domestic capital to cover the extra expenses. As the disaster developed, the flight to the safety of U. Treasury securities by investors all over the world more than offset any repatriation of funds back to Japan. The Bank of Japan has been injecting funds into the banking system to ensure that there would be no shortage of cash or funds to lend and no spikes in Japan's interest rates.

This far exceeded the 4. In such a case, Japan could face a sovereign debt crisis similar to that faced by Greece.

Japan’s 2011 Earthquake and Tsunami: Economic Effects and Implications for the United States

This is three levels below the highest possible rating. According to one analyst, it is unlikely that those citizens would dump their bond holdings if the government takes on more debt to rebuild the area struck by the earthquake and tsunami. Financially, Japan's government appears to have more maneuvering room than might seem apparent by the debt ratios. On May 2, , the first FY supplementary budget bill for recovery and reconstruction from what the Japanese government is calling the Great East Japan Earthquake passed the Diet.

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The budget totaling 4. A key goal of the government is to build temporary housing for the thousands still in shelters. An estimated 30, homes are to be completed by the end of May By the end of August, it is hoped that temporary housing will be available for everyone who needs it, and evacuation shelters can be closed.

Most insurance payments are expected to be borne primarily by Japanese insurance companies and their government. Insurance companies everywhere, however, pass some of their risk exposure onto global reinsurance providers. Japanese insurers jointly own a reinsurer, the Japan Earthquake Reinsurance Company, which in turn is backstopped by the Japanese government.

Ultimately, the government stands as the insurer of last resort in the case of earthquakes. As for individual homeowners, most tend not to carry earthquake or flood insurance. Household rebuilding, therefore, is likely to come out of household savings, some of which has been invested overseas. As of April 6, , earthquake insurance payments stemming from the March 11 quake reached Most of these payments were for damage in the Tokyo area because the amounts for payments for the devastation in the areas around Sendai worst hit by the quake were yet to be determined.

The two economies are integrated via trade in goods and services—they are important markets for each other's exports and important sources of imports. Japan and the United States are also connected via capital flows. Japan is a major foreign source of financing of the U. Japan is also a significant source of foreign private portfolio and direct investment in the United States, and the United States is the origin of much of the foreign investment in Japan.

Japan and the United States remain important trading partners to one another; however, their relative importance has declined over the years as other trading partners have increased their importance. In , Japan accounted for S imports by In , the United States accounted for The diminished importance has been the result in part of the development of international production networks and the segmentation of production processes across countries giving rise to China as a important trading partner for both the United States and Japan.

An important factor in determining the volume of trade flows is the relative growth rates in each of the trading partners. For example, in , both U. The crisis was particularly hard on a Japan that was trying to recover from more than a decade and a half of economic stagnation. A major portion of U. Many economists expect Japanese economic growth to rise as the country begins to recover from the damage. Increasingly, international trade results from the segmentation of production processes that take place within transnational supply chains.

On the one hand, such transnational production networks can result in more efficient production and lower costs; on the other hand, any disruptions within the chain can halt production down the line. One possible, albeit incomplete, indicator of the role of supply chains in U. Some sectors of U. Some Japanese auto manufacturers, such as Toyota Motor Corp. Other manufacturers who may not be directly located in the earthquake area have been affected by power outages and other effects of the disaster and have had to curtail operations, reducing output.

Japanese auto manufacturers have also been adversely affected by disruption of operations of parts suppliers. Some Japanese-owned companies in the United States have had to curtail operations because they cannot obtain parts from Japan. Japan's share of U. On the import side, though, an interruption of Japanese supplies could disrupt production, especially for Japan's U. Far less easy to quantify is the potential damage to confidence, especially for a fragile consumer.

Sentiment fell sharply in early March because of the recent surge in oil prices amid turmoil in the Middle East. The Japanese earthquake, with extreme uncertainty over the extent of the nuclear disaster there, may add to a sense that global events are spinning out of control. This can make consumers—and, perhaps, businesses—more fearful, which can lead to postponement of decisions to purchase or hire. Such reactions to natural disasters are usually short lived, but we cannot yet know when events in Japan will stabilize.

That means merchandise exports to Japan represented 0. There is likely to be some initial disruption, but as reconstruction efforts gather pace, one would expect exports to Japan to rise, rather than fall.

Global Economic Impact of the Japanese Earthquake, Tsunami, and Nuclear Disaster

That is equivalent to 0. In cases where supply chains rely on Japanese parts, there will be disruption to U. Ideally, they would like to gear up U. Some domestic producers will gain due to substitution effects. If Japanese-brand vehicles are in short supply, that will shift demand to other brands. If domestic parts can be substituted for Japanese parts, then demand for domestic auto parts suppliers will rise.

But even non-Japanese U. Europe The overall impact on European growth should be limited. Japan is not a huge export market for most European countries, although any impact to global growth would obviously have an effect. In , Asia as a whole accounted for 7. If the impact on Japanese growth will be limited in the near term and there is some boost to growth further out from reconstruction work, then Western European growth will not be significantly effected. Therefore, it is more vulnerable to shocks than would be the case if it was in the middle of a robust upturn.

Germany is the most export-oriented Eurozone economy, so it may be hit more than most. But German growth is showing clear signs of becoming more broadly based due to elevated employment and improving wage growth, so it is likely to hold up better than if this had happened a year ago. Indirect effects via the dampening impact on intra-Asian trade could be larger. The time factor will be critical. Any extended period of much-reduced trade activity between Japan and the rest of Asia notably China will also inhibit German exports to non-Japan Asia. Non-Japan Asia Most of Japan's manufacturing base has not been directly affected either by the earthquake or the tsunami, so disruptions to intra-Asian trade as a direct effect of productive capacity loss are likely to be limited.

For countries relying on energy exports to Japan, such as Australia and Indonesia, events in Japan may in fact provide a small opportunity if some of Japan's energy needs, previously met by nuclear energy, are redirected toward thermal coal or gas. In such an event, Indonesia stands to benefit more, as Australia's mining sector already operates close to full capacity, apart from still recovering from the effects of the Queensland flooding though most of the flood-related damage was done to coking coal mining, not thermal.

Earthquake, Tsunami Hit Japan: Assessing the Economic Impact

The biggest unknown at this point remains the possibility of factory shutdowns due to insufficient electricity supply as opposed to facility damages. Current expectations are that blackouts will phase out by the end of April, but should they continue beyond that point or become more severe, there will be detrimental effects on Asia's integrated manufacturing cycles. These countries are, therefore, more vulnerable than others to sustained disruptions in Japanese output.