Macroeconomic impact of Japan's earthquake

BEDFORD, MA, April 4, 2011 (RISI) - The earthquake and tsunami that struck Japan two and a half weeks ago was one of the largest in recorded history, and caused damage that was unprecedented in an advanced industrialized country. Our thoughts and sympathies are with the people of Japan as they struggle with the tremendous loss of life and devastation to their homes and livelihoods. But beyond just the personal trauma sustained by individuals, the capital stock and infrastructure of the country have suffered a tremendous shock. The question now is what effect it will have on the Japanese economy and in turn whether it will disrupt the still somewhat fragile global economic recovery. While data is still sketchy, a clearer picture of the impact is emerging.

For Japan's economy, the short-term impact is decidedly negative. The latest estimates suggest that reconstruction costs will be around $300 billion, meaning that the government will need to increase its borrowing by approximately this amount. One of the risks that has been brought up in other analyses is that given Japan's already gargantuan deficit -- more than 200% of GDP -- this additional fiscal stimulus could precipitate a debt crisis. We believe, however, that this is unlikely. In total, the costs of rebuilding will increase the country's debt/GDP ratio by about 1 percentage point through 2014, and it is unlikely that this added percentage point will be the straw that breaks the camel's back.

The crisis at the Fukushima Daiichi nuclear complex is also causing problems more far-reaching than just the potential release of radiation. Japan currently generates approximately 30% of its electricity needs from nuclear energy. Approximately half of that generation is currently shut down as damage is being repaired or assessed. Part of that will most likely come back in the next few months, but total capacity will clearly be reduced. This is already causing rolling blackouts throughout large portions of Japan. These power disruptions are causing factories to slow or halt production in many industries and this, along with the shuttering of factories due directly to the earthquake or tsunami, is creating concern about the global supply chain. For some industries this could be a short-term problem -- automobile manufacturers located in the earthquake and tsunami zone will undoubtedly have fewer cars to sell, as well as components for those cars that are assembled in other locations around the world.

This is an excerpt from a full story that is available in RISI's Pulp & Paper News Service

David Katsnelson, Senior Economist, Macroeconomics, works out of RISI's Bedford, Massachusetts, office and can be reached at             781-734-8982       or by email at dkatnelson@risi.com.