Will Japan's Disaster Hurt The Global Economy?

Smokes simmers from a factory destroyed by the tsunami in the town of Ofunato in Iwate prefecture. Economists say it's still too early to assess all of the economic impacts of the disaster. i i

hide captionSmokes simmers from a factory destroyed by the tsunami in the town of Ofunato in Iwate prefecture. Economists say it's still too early to assess all of the economic impacts of the disaster.

Toshifumi Kitamura/AFP/Getty Images
Smokes simmers from a factory destroyed by the tsunami in the town of Ofunato in Iwate prefecture. Economists say it's still too early to assess all of the economic impacts of the disaster.

Smokes simmers from a factory destroyed by the tsunami in the town of Ofunato in Iwate prefecture. Economists say it's still too early to assess all of the economic impacts of the disaster.

Toshifumi Kitamura/AFP/Getty Images

The attacks on Sept. 11 prompted analysts to ponder this question: How bad does a disaster have to be for it to bring down a country's whole economy?

Marcus Noland, deputy director of the Peterson Institute for International Economics, says it all depends on whether the effects of a disaster spread beyond the local area and make their way through a country's power, transportation or communication networks.

"The real question with Japan is the power sector — to what extent these nuclear power plants both create local problems in terms of meltdown, but from an economic standpoint, to what extent do they disrupt the national electrical grid and spread disruption to the rest of the country?"

Japanese officials are still assessing the damage to their country from last week's earthquake, tsunami and crippled nuclear reactors.

The cost will clearly be in excess of $100 billion, according to preliminary estimates.

The Japanese economy is likely to shrink, at least temporarily, as a result of the lost production. But whether the global economy will be severely hurt is less clear.

Japan's most important economic zones were not immediately affected by this disaster but that could still come if the power grid breaks down, for example.

Obviously, the more deeply Japan's own economy is affected, the more the world's economy will suffer.

Assessing Damage To Global Supply Chains

Because of global supply chains, halting the production of one little component of something in Japan may affect the production of other components in other countries. That's true for the assembly of big things like cars and little things like microprocessors used in some high-end devices.

"I'm talking about things like cell phones that have fancier graphics on them," says Jim Handy, who follows the semiconductor industry for the market research firm Objective Analysis.

He says some components come from factories in areas of Japan that were barely touched by the earthquake, but which nevertheless have been closed out of a concern that the production equipment may have been slightly jarred.

"The equipment does have to be looked at again, to make sure it is still in alignment and can still be used for production," Handy says.

Impact On The Oil Market

The global oil market could also be affected. Oil prices fell Monday because of an expectation that Japan, a big oil importer, will need less oil in the short run if its economy is shut down. But Scott Brown, chief economist for the Raymond James investment firm, sees the earthquake in Japan soon driving oil prices back up.

"Once repairs get under way you'll probably end up seeing even more oil imports because of the shutdowns in the nuclear facilities," he says.

On the other hand, Noland of the Peterson Institute thinks Japan's effect on the international oil market could easily be overstated.

"From a global standpoint, the events in the Middle East and the effect on oil markets dwarf what is happening in Japan," he says.

Of course, that's looking at what's happening in Japan purely in economic terms — not considering, for the moment, the human tragedy there.

Shifts In Production For Auto Industry

Economic activity adjusts heartlessly. Production moves from one country to another.

Peter Morici, an economist at the University of Maryland, who was formerly with the U.S. International Trade Commission, notes that even a temporary shutdown of auto production in Japan could actually boost production by automakers in other countries including South Korea, or even the U.S.

"To the extent that Camrys and Corollas don't come here because of the shutdown and Ford and General Motors and Hyundai capture customers, they're likely to keep those customers," he says.

Toyota, meanwhile, might just see its market share decline.

Still Too Early To Assess The Damage

But in truth, it's probably just too soon to assess what the earthquake and tsunami are likely to mean for Japan's economy, for the U.S. economy or for the global economy.

Byron Wien, the vice chairman of Blackstone Advisory Partners, says there are too many unknowns. But he is sure of one thing: "This is a very major event, and it's going to have, obviously, major implications for Japan, and I think it's going to have major implications throughout the world."

At this point, it is the human toll that matters most. By that standard, Japan hasn't experienced a tragedy like this in more than 60 years, and for now the humanitarian challenge of coping with the disaster takes precedence over the economic issues that will follow.

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