Tsunami's Effect On Japan's Economy Hard To Judge The disaster in Japan, which has the third-largest economy in the world, could have ripple effects around the globe, including the United States. But economists say it's much too soon to say whether the worst-case scenarios will actually come to pass.
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Tsunami's Effect On Japan's Economy Hard To Judge

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Tsunami's Effect On Japan's Economy Hard To Judge

Tsunami's Effect On Japan's Economy Hard To Judge

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Stock markets plunged around the world today on concerns of the tragedy unfolding in Japan could devastate the country's economy, and that could push the rest of the world back into a recession.

Japan has the third largest economy in the world. And as NPR's Tom Gjelten reports, a disruption of manufacturing there would have ripple effects around the globe, including here in the U.S.

TOM GJELTEN: Japan has a standard by which to assess this disaster: The 1995 earthquake that devastated the city of Kobe, west of Tokyo, caused more than $100 billion of damage. The earthquake last Friday was worse; the death toll will surely be higher. It was accompanied by a tsunami wiping out whole towns and cities, plus it triggered a nuclear crisis whose dimensions are not yet clear.

Nevertheless, some economists say this disaster may yet prove less consequential in economic terms because of where it happened. Nicholas Szechenyi is a Japan specialist at the Center for Strategic and International Studies.

Mr. NICHOLAS SZECHENYI (Japan Specialist, Center for Strategic and International Studies): The northeast region is not as much of a manufacturing hub as western Japan. So that might contribute to the arguments that the economic impact in the long-term might not be as great.

GJELTEN: Nearly a million people live in or around Sendai, the city knocked flat by the earthquake and tsunami. But it's relatively isolated from Tokyo, which is Japan's economic center.

Marcus Noland of the Peterson Institute for International Economics says what's important in a case like this is what happens in regions that may not be physically damaged, but are connected through networks to the disaster site.

Mr. MARCUS NOLAND (Senior Fellow, Peterson Institute for International Economics): The most likely channels, in most cases, are things like the transportation system, the electrical grid, communications networks.

And in the case of the earthquake in Japan, it appears to be the electrical grid which is the one network that is potentially affected by this, that could spread the negative impact of this event throughout the country, and generate a significant macroeconomic impact.

GJELTEN: This is the big unknown in Japan. According to some estimates, about 7 percent of the nation's generating capacity has been lost so far. That might be manageable. But several nuclear power stations are still in major danger.

Beyond Japan, Nicholas Szechenyi raises the question of how global production will be affected by the loss in Japan of one item in a supply chain.

Mr. SZECHENYI: If you're manufacturing components in different places, and have to pull all of those together for final assembly, and some points in that chain are shut down, that can certainly have an impact.

GJELTEN: The global auto industry could be affected by the earthquake. Also, semiconductors, whose manufacture depends on extremely sensitive equipment. One plant in the quake-affected area, for example, makes processors that are essential for the graphics used in smartphones.

And here's another question, the reconstruction effort in Japan will test the government's ability to borrow. Japan is already one of the most indebted countries in the world. If nervous investors were now to dump some of that Japanese debt, the government could have a harder time financing a rebuilding effort.

But Marcus Noland points out that much of the debt is held by Japanese, not foreign investors.

Mr. NOLAND: As a consequence, it gives the Japanese government a bit more room to maneuver, especially in the context of rebuilding a devastated city. I just don't see the average Japanese dumping government bonds if the government says, we're going to spend a little extra money to rebuild northern Japan.

GJELTEN: Of course, if those Japanese investors focus on their own country's needs, they may be less willing to buy U.S. bonds - that could drive interest rates here up a bit.

Tom Gjelten, NPR News, Washington.

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