Analysis of Japan’s Natural Disaster

The triple crisis which hit Japan on March 11 and subsequently, has led to a trail of devastation in its wake. Weeks after the crisis the death toll has crossed 12,000 counts, with 15,500 people still missing, and 4,50,000 people rendered homeless. The government’s estimate for the direct damage caused by the disaster is as high as $310 billion, accounting for about 6% of Japan’s GDP, making it the world’s costliest natural disaster till date. The present estimate covers damage to roads, homes, factories, and other infrastructures, not including the loss in economic activities on account of the disaster, or, the loss of human lives, which can never be calculated in any monetary terms. Factory shutdowns, power cuts, and the impact on consumer’s confidence have hurt Japanese economy. The impact of fears of radiation and food contamination has also hurt business and consumer sentiments worldwide.

But, as damages to property are great, and Japan is a net importer of most of its essential needs, demands for food, water, and other essential items are likely to increase. Once reconstruction process is put into motion, demands for raw materials for construction would also arise in the near future. Though the government is yet to decide on how it will finance the budget for reconstruction, the reconstruction process in Japan may hurt its already severe public debt, which is presently about 200% of its GDP, the biggest among the industrialized nations. Any additional supply of government’s bonds could push up Japan’s borrowing costs. Japan’s Finance Minister Yoshihiko Noda has warned against relying too readily on debt issuance; instead emphasized on the need to ensure market confidence.

Japan accounts for 4.5% of the global trade. The disaster has led to a ripple effect affecting production and supply chains of various industries through-out the world. The northern Tohoku region, most affected by the disaster, accounts for about 8% of Japan’s GDP, and is host to a number of factories making products from cars to beer. Companies like Sony, Toshiba Corp, Toyota Motors, Honda Motors, Nissan Motors, Mitsubishi Motors Corp, Suzuki Motor Corp, refiner JX Nippon Oil & Energy Corp, Cosmo Oil, Tokyo Electric Power Co, East Japan Railway Co., Shin-Etsu Chemical Co., Nippon Paper Group, Nippon Suisan Kaisha, Nippon Steel Corp, Canon, beer maker Sapporo Holdings, convenience store operator Lawson, etc. operations were either affected or, were forced to shut down their plants in northern Japan. For example, disruptions at Shin-Etsu and Sumco Corp, which accounts for about 60% of world’s electronic wafers, needed to produce semi-conductors, will undermine global supply. The Louisville, Kentucky, plant of US automobile major Ford is being shut because of supply chain issues related to plant closing in Japan. Nissan Motor Co. will adjust its production schedule due to parts shortages caused by the crisis in Japan. The crisis has led companies to not only close down some plants in extreme cases, but has also provided an opportunity to some of the companies to take readjustment measures by redefining their priority, which in normal times would have required a fair amount of convincing and coaxing among board members.

To understand the impact of crisis on the domestic Japanese market and its global affect let us take the example of luxury goods. According to Deutsche Bank, last year nearly a quarter of luxury products were bought by the Japanese, more than any other single region. Japanese consumers at home and abroad accounted for 24 percent of all luxury goods sales in 2010, compared with 22 percent in Europe, 20 percent in North America, 19 percent in China, and 15 percent in other markets. Though luxury products are viewed as a sign of the upper class in other countries, in Japan, they have long been seen as an integral part of middle class life. According to analysts, Japanese demands in the luxury sector could tumble as much as 30 percent this year and remain tepid for up to five years, as at least in the short term people are more likely to focus on basics and are less likely to go for expensive luxury items. Life’s priorities have taken a starkly different cast after the crisis which may impact consumer optimism in various industries including automakers and cell phone industries, among others.

Impact on India

Though the crisis in Japan has affected Indian exports of iron ore, animal protein, seafood etc. it will not have major impact on India’s growing economy, as the overall percentage of various commodities exports to Japan constitutes a small percentage of their overall sectoral composition. For example, in the IT sector, Japan is the third largest IT market globally, but India’s IT exports to Japan accounts for only about 2% of overall India’s IT exports. Therefore, Indian IT industry may not be impacted to a very large extent. But, this argument does not negate the fact that business to individual companies, especially small and medium firms which has been dealing with Japan, can be affected.

In the automobile sector, Japanese automobile companies in India may have to stop importing high-end cars, bikes, and critical spare parts, if their parental companies in Japan have downed shutters of factories affecting the operations. For example, Suzuki Motors which holds 55% stake in India’s largest automobile company Maruti Suzuki, imports engines and gears from Japan for its cars such as Swift. Shortage of spare parts for its products may hamper production in the near future. Honda Siel Cars India, which imports parts for its sedan Accord from Japan, may also have to battle with supply problems as its plant at Saitama in Japan has been closed. But, these isolated instances though will affect individual companies; they may not impact the growth of overall automobile sector in India.

However what the crisis in Japan will indeed affect in India is the incremental inflow of fund for infrastructural projects. Due to delay in the flow of these funds, the projects may be affected. Insurance market of India is also likely to feel the jitter as reinsurance rates in international markets are expected to harden.

As Fukushima nuclear power plant has been adversely affected, to offset the shortfall in electricity demands, Japan’s gas fired power stations are likely to burn more fuel, including liquefied natural gas, to meet its energy needs. The use of diesel fired equipment to clear the rubble after earthquakes will further lead to boost in oil demand. The growing uncertainties and instabilities in the key oil export markets will further complicate the oil situation. Therefore, the world at large including India will feel the heat in the energy sector, as refiners and LNG importers are likely to face volatile prices, both on account of demand side and supply side problems. These conditions can lead to demand swings, triggering sharp ups and downs in the oil market.

However, the outlook for India’s nuclear energy is unlikely to change in the face of Japan disaster. The crisis in Japan though will lead to review of safety standards and new designs and new technologies for plants, it is unlikely to change the growth in nuclear energy sector in India.

The crisis in Japan is also likely to trigger some salutary effect in India and some other countries, as the crisis may accelerate Japanese companies’ plans to build manufacturing presences in safer and low cost countries like India. For example, the natural calamity is likely to push steel companies from Japan to speed up plans to build manufacturing plants in India, as there is likely to be an increase in demands for their products, not only in India, but also in their domestic market. The strong steel demand pattern in both the countries would be an attractive force for the companies to accelerate their processes. Because once rebuilding process starts in Japan, demand for everything from metals, coal, timber, rubber, food, animal feed, etc. is likely to increase. The increase in demands for these products in the Japanese market would increase the prices of raw materials in the global market.

In sum, the crisis in Japan has come at the worst time as it was struggling to lower its budget deficit close to 10% of its GDP and trying to cope with an aging population. But in the near future industrial and material firms are bound to regain lost ground, as the rebuilding efforts in Japan gains momentum. The fiscal stimulus to reconstruct Japan out of these disasters has provided an opportunity to Japan to rebound economically; as the fresh investment for the rebuilding effort would generate fresh employment and accelerate economic growth.

On a more optimistic note, it can be said that though Japan is facing its worst misery since the World War II, the misery has provided an opportunity to Japan not only to rebound economically, but, on a more important note, to rebound socially, by bridging social relationships, which took a backstage in its race for breakneck economic gains earlier. The revival of the importance of human relationships would be the major gain for Japan out of its unfolding calamities.