Japan: Geoeconomic Consequences of Nature’s Fury and Human Folly

March 18, 2011 at 4:02 pm | Posted in Nuclear Non-Proliferation, Outsourcing, Political Economy, Production | Leave a comment
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Scarcely believable images of the destruction wrought by a 9.0 earthquake that struck 250 miles northeast of Tokyo and unleashed a tsunami that generated 10 meter high waves–of entire communities being obliterated–and made worse by triggering a nuclear meltdown at the Fukushima Daiichi plant has been at the center of world news. While concern has understandably been on the human cost of the tragedy, the economic costs are also staggering. While it is too early to make an assessment, early estimates already suggest that world economic growth may fall by at least a full percentage point.

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In the most immediate instance, it would cause enormous supply chain disruptions to production as Japanese manufacturers produce a whole array of sophisticated components and finished products. For an economy vitally dependent on exports this could be a vital blow–but it would also affect manufacturers world-wide as they source components from Japan, Additionally, the demand for reconstruction funds for Japan could reasonably be expected to lead to a redirection of financial flows with adverse consequences not only for debt-ridden economies like those of the United States but also for the ’emerging economies’ of the Global South.

The estimated $200 billion required to rebuild Japan after the earthquake on March 11, 2011 and the tsunami already triggered a 6 percent rise in the yen with 5 days–from a peak of ¥76.25 to the dollar to ¥81.20–as investors started repatriating funds for Japanese reconstruction before the G-7 economies intervened in currency markets in a concerted effort to drive the yen lower and help stabilize the Japanese economy as a higher yen would have made Japanese exports dearer overseas and hence driven down demand for them.

Fears that radiation from the crippled nuclear reactors at Fukushima Daiichi may be transported through Japanese exports has led to many restaurants to ban Japanese food items like sushi, Kobe beef, and sake. But there has also been apprehension that consumers may be exposed to radiation when driving a Prius car or using a Japanese DVD–a severe blow to an export dependent economy. Even though such fears may be misplaced because the main manufacturing centers are located away from areas near the crippled nuclear reactors and most manufacturing occurs indoors in factories and hence is not directly exposed to airborne radioactive particles, apprehensions are by nature irrational and could lead to a steep decline in consumer demand.

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On March 17, General Motors became the first automobile manufacturer to announce that it will temporarily halt production in its truck plant in Shreveport, Louisiana because of a shortage of Japanese-made parts as a result of the natural disasters in that island nation. The fact that was GM rather than Toyota, Honda, or Nissan to be the first auto manufacturer to stop production because of supply-related problems stemming from the natural disasters underlines the gravity and extent of the disruption of supply-chains from Japan for producers the world over. 10 percent of Volvo’s parts for instance comes from 33 Japanese suppliers, 9 of which were in areas affected by the disasters and Volkswagen has warned of medium-term supply problems. Some Japanese manufacturers–Mitsubishi and Nissan–have opened some of their facilities while Toyota is due to open some of its plants early next week. It is uncertain how long these can operate because they and their suppliers may face problems obtaining raw materials and parts and in shipping finished products due to logistical problems caused by the earthquake, tsunami, and the exclusion zone imposed by fears of a nuclear meltdown at the reactors in Fukushima Daiichi. A Detroit based consultant, John Hoffecker, estimates that an average car had 20,000 components and the abrupt loss of any one component could halt production in its tracks, especially because most manufacturers have implemented just-in-time production systems that reduce inventories.

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Given Japan’s advanced manufacturing technologies, disruptions are not limited of course to the automobile sector. Sony Ericsson and Nokia have warned that they face supply problems for their smart phones, for instance. Apple Computer’s latest gadget the iPad 2 depends on the advanced manufacturing technologies of Japan for crucial components like flash memory to store audio and video files that are manufactured by Toyota which shut down its manufacturing facilities due to the earthquake and tsunami. Other iPad 2 components sourced from Japan include “AKM Semiconductor and DRAM memory produced by Elpida Memory. A touchscreen overlay glass is likely from Asahi Glass.” Even if these suppliers are not directly hit by the earthquake, tsunami, or t, the logistical disruptions caused by the natural disasters including obtaining raw materials and parts and shipping finished goods are likely to hamper production.

it is impossible to assess the costs of reconstruction. Initial estimates of $200 billion were based on the experience of the 1995 Kobe earthquake. Not only was the present earthquake much more destructive in scale but it was also accompanied by a massive tsunami and a nuclear meltdown. With a debt-to-GDP ratio double that of the United States, and credit-rating agencies being more prudent after the financial crisis of 2008-09, raising funds at a tolerable rate of interest could be difficult. Unlike the United States which could pump $600 billion as stimulus during the financial crisis, the yen does not enjoy international reserve currency status and hence this is not an option for the Japanese.

This raises the possibility that Japan, which is the third largest holder of US Treasuries, will sell off large chunks of the $877 billion it holds to finance its reconstruction–a sell-off that will have a major impact on interest rates all across the world and depress the value of US Treasuries and could trigger an avalanche of sales of the Treasuries as other holders seek to minimize their holdings. It could cause another enormous liquidity crisis as the financial crisis just did and comes at a time when the economies of the US and the European Union are still weak.

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