In the latest Export Finance and Insurance Corporation’s (EFIC) World Risk Developments newsletter, EFIC’s chief economist Roger Donnelly examines likely repercussions from the Japanese earthquake.
Before the gravity of the damage at the Fukushima nuclear power plant became apparent, many analysts were taking the Kobe quake of 1995 as their benchmark for what could happen. That quake had little discernible impact on GDP, even though it cost 6000 lives and $120 billion in property damage.
The recent quake has hit a more agrarian and sparsely populated area than the Kobe quake. The recent quake has been bigger, has affected a larger area and has done more damage. Quite apart from whatever damage the nuclear incident inflicts, the quake has caused extensive damage to the national power and transport grids.
As a result, rolling blackouts are expected at least till end April, hitting power supply to industry as far as the industrial Shizuoka and Kanagawa prefectures. Rail transport – freight and passenger – in the entire Kanto and Tohoku regions has also been hit hard. There are also nationwide reports of petrol shortages.
In addition, the recent quake has hit at a time when Japan's public debt is much more burdensome, and therefore, according to some analysts, the government has less 'fiscal space' to accomplish reconstruction.
What is less remarked upon is the fact that Japan's net external assets have also risen markedly since 1995 and Japan remains the world's largest net external creditor.
Donnelly says taking all of these factors into account, a consensus started to emerge
“This said first that the short term hit to GDP from the recent quake would be larger than from Kobe. Second, the economy could quickly bounce back as the economic disruption faded and reconstruction got underway. Overall, there seemed to be little case for marking down pre-quake GDP forecasts for 2011 as a whole,” he says.
“But then the gravity of the nuclear situation began to escalate quickly. In rapid succession, various experts began to upgrade the incident from a Level 4 on the International Nuclear & Radiological Event Scale to a Level 5 or even 6.’ (The scale goes from 1-7, with 7 being the most serious. The 1985 Chernobyl incident in the Ukraine is a 7.)”
According to Donnelly, if the nuclear crisis does escalate further, with radioactive material spreading widely across the country, the economic damage could also correspondingly rise.
• Australia is not as dependent on Japan as an export market as it was in 1995. Then, we sold 25% of our merchandise exports to Japan. Now the number is 14%.
• The Kobe quake did not noticeably hit Australian exports to Japan in 1995. Exports did fall by almost 9% in the March quarter of 1995 in the immediate aftermath of the quake, but there appears to have been a heavy seasonal element in this fall. Exports were up almost 4% in year-ended terms.
• Our main exports now are: coal (coking and thermal) 40% of total; iron ore 13%; beef 5%; copper 3%. Confidential items make up 17% of the total and include LNG and nickel.
• The disruptions to nuclear power will prompt the Japanese power industry to fire up power capacity using other fuel sources. But coal-fired capacity is reportedly working at full tilt. Oil- and LNG-fired capacity should receive the main demand boost.
• Our main service exports to Japan are tourism. Like merchandise exporters, the Australian tourist industry is no longer as dependent on Japan as it was a decade or more ago. Japan is still the fourth largest source market, but its share is declining. By 2009, travel from Japan had declined by 53% from its peak of 814,000 visitors in 1999. The ‘Total Inbound Economic Value’ of the Japan market – a measure of the Australian sales turnover from Japanese tourists – was $1.4 billion. More than 50% of Japanese tourists go to Queensland.
• Japan is our third largest source of imports, making up 9% of the national import bill. Cars, trucks, refined petroleum and equipment are major items. Various importers have voiced concerns that because of production and supply chain disruptions in Japan, their supplies could be affected, at least in the short run.
• There is likely to be a larger short-term setback this time than after the Kobe quake, regardless of how the nuclear situation plays out. But offsetting that, Japan is no longer such a significant export or tourism market for Australia and we are in the midst of a commodity export boom.
• As reconstruction gets underway in coming quarters demand for Australian commodities such as coking coal and iron ore could increase.
• Exports of LNG, but not thermal coal, could increase as the Japanese power industry fires up spare non-nuclear power production capacity.
• Japanese tourist arrivals are likely to drop, which will be an unwelcome setback for the tourism industry, especially in Queensland, suffering as it already is from the strong Australian dollar plus the recent floods and cyclone.
• Imports from Japan could suffer short term disruptions. It is likely that Australian tourist numbers to Japan will decline.
The newsletter also looks at oil prices, China, India, Turkey, Pakistan and Mongolia.
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