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Will Japan’s Crises Disrupt Global Economic Recovery?

March 15, 2011 at 6:52 PM EDT
Many of Japan's factories, a key component of the global supply line, have been crippled the earthquake or tsunami, or have ceased production due to rolling blackouts. Ray Suarez talks with The Economist's Greg Ip about the global economic impact of Japan's earthquake, tsunami and nuclear disasters.
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JEFFREY BROWN: And we turn to another impact of the disaster in Japan: the economic consequences there and around the world.

Ray Suarez has that story.

RAY SUAREZ: Global markets plunged today following reports of new explosions and a larger radiation release.

The shutdown of power plants has led to rolling blackouts throughout Japan. And that, in turn, has caused auto manufacturers and electronics factories to shutter nationwide. Some of those factories affect the supply pipeline for key goods around the world.

Greg Ip of “The Economist” magazine joins us to discuss what’s behind some of the fear and the reactions.

And, Greg, the Nikkei has had the largest two-day sell-off in more than 20 years, the major Japanese stock index. And then other markets, as the sun came up, started to follow suit. Why?

GREG IP, “The Economist”: In the last few days, initially, the reaction of foreign markets to the disaster in Japan was, this would be containable; the negative effects would mostly be in Japan; and, perhaps, as we saw with the Kobe earthquake in the mid-1990s, they would be transitory.

This morning, they woke up to the news that maybe this is actually magnitudes worse than anything they have seen before, not just an earthquake, but a nuclear disaster. And if you think about it, the damage to the economy, not just in Japan, but the world, is proportionate to how bad the disaster is.

The further the radiation spreads, the longer the disruption lasts, the more damage to the infrastructure, the more damage to supply chains. And so, naturally, investors are trying to sort of struggle with pricing that into the future for the economy.

Now, as the day wore on, they got news that maybe the disaster was going to be contained after all, and so markets rallied somewhat.

RAY SUAREZ: In fact, around midday, the American stock indexes began to claw back most of their opening losses. So, can we look at this as a transitional thing, just until markets figure out just how bad off Japan is?

GREG IP: Not yet, I don’t think.

I mean, remember, the disaster has already turned out to be worse than we thought just on Friday morning, when the first news came out. The reason investors are taking it so hard is because they just don’t know how to quantify their risk.

I mean, how many people will ultimately have to be evacuated? How far will the radiation spread? How long will the disruptions last? And the natural reaction, faced with that kind of uncertainty, not just for investors, but for businessmen and even households is I’m going to stay close to home. I’m not going to take risks. I’m not going to make big investments now.

RAY SUAREZ: Apart from risk and speculation and pricing future events, there’s real practical nuts-and-bolts effects in Japan. It’s one of the world’s largest suppliers of flash memory, of semiconductors.

How does this affect far-flung factories, far, far away from Japan and its problems?

GREG IP: Well, you know, even though it was a big news event when China surpassed Japan as the world’s second largest economy, Japan is still the third largest economy in the world and the key supplier for a lot of key technologies, as you mentioned, like flash memory, which goes into like cell phones and smartphones, silicon wafers that are used to make chips and so forth.

And, in many cases, these — Japan is the key supplier for a lot of manufacturers, including here in North America. You have already seen companies announce shutdowns, albeit temporary, of automotive assembly lines because they’re unsure of the supply of parts from Japan.

Now, they have inventories of these parts. And it may be that if this disruption only lasts a few weeks, we won’t see anything serious. But, again, we really don’t know how long this disruption will last. What we have been reminded of is that, notwithstanding the difficulties Japan has gone through in the last two decades, they’re still a vital supplier in many key industries.

RAY SUAREZ: And one thing that makes them unique among the world’s industrial powers is that they have almost no natural resources of their own. Are they peculiarly exposed, uniquely exposed in the energy sector, let’s say, for oil?

GREG IP: Well, in fact, one of the reasons Japan depends on heavily on nuclear power is precisely because of the national policy of trying to resist getting too dependent on fossil fuels.

One of the big question marks over not just the Japanese, but the world economy, now is does this disaster seriously impair the deployment of nuclear power, which many people had hoped would take up the slack from fossil fuels, as we tried to curb carbon emissions?

The possible result of this is that if Japan has to go without as much nuclear power as it has had in the past, it will need more fossil fuels. That could add to the upward pressure on the price of oil, which has already been a problem that the American economy has been struggling with.

RAY SUAREZ: Well, when the ground started to shake, we were already seeing oil north of $100 a barrel. Could Japan’s problems end up slowing down the recovery for the entire world economy?

GREG IP: It certainly could, certainly through this impact of creating more uncertainty.

I mean, if you think about it, if it’s — it’s one things to have these problems in Japan. But we’re also having all the unrest in the Middle East, which has put upward pressure on the price of oil. And we have still got problems in Europe, where they have not solved the debt problems of countries like Greece and Portugal.

A year ago, when the European debt crisis first erupted, it ricocheted into our markets, as investors and businessmen here tried to sort of comprehend, what does it mean for the American economy?

And you saw a big slowdown in economic growth right around that time because of this uncertainty effect. We’re now dealing with kind of a triple whammy of all those things. At this point, it probably does not stop the considerable momentum the recovery has. But if it lasts for some more weeks, all bets are off.

RAY SUAREZ: What about Japan itself? After the Kobe earthquake in 1995, even in the midst of its own economic problems, sluggish growth, really difficult indebtedness problems, they managed to rebuild a major Japanese city quickly, beautifully. And — and now we’re looking at something much larger perhaps, but can they afford it?

GREG IP: Well, one of the remarkable things is how humanity does recover from these disasters, and often with more resilience and speed than you think. That earthquake is one example; 9/11 in our case is another example — partly because of the application of enormous, you know, effort by policy-makers, such as central banks and governments, who pour money into reconstruction.

I mean, rebuilding from World War II was a much bigger task for Japan, and they accomplished it. Now, as you say, Japan does have this problem. They’re heavily indebted. Their debt is something like two-and-a-half times national GDP, one of the most indebted countries in the rich world.

And there are concerns that if they have to borrow even more to finance this reconstruction, that will really strain the country’s ability to stay solvent. Personally, I’m not too worried about that at the moment. The Bank of Japan has the means to finance plenty of borrowing. The Japanese are very, very high savers. They have bought all their government’s debt to date, and I don’t see why they wouldn’t buy more.

And it’s conceivable that, if done right, a really vigorously financed, executed reconstruction scheme could actually in the end prove to be a big boost to Japanese economic growth.

RAY SUAREZ: Greg Ip of “The Economist,” thanks a lot.

GREG IP: Thank you.