Wednesday, 16 March 2011

Japan’s earthquake will deepen the economic crisis



Japan’s earthquake, tsunami and nuclear meltdown emergency have begun not only to destabilise the world’s third-largest economy, but deepen the economic crisis and financial fragility afflicting global capitalism as a whole.

Production halts, rising sovereign debt, interruptions to investment flows and soaring energy prices are driving home shocks to Japan’s economy, with unfathomed international implications.

Ports, airports, highways and manufacturing plants shut down, the Japanese government has predicted “considerable impact on a wide range of our country’s economic activities.” Yesterday, Japanese stocks closed down more than 7.5 percent, wiping out $US287 billion in market capitalisation in the biggest one-day fall since the eruption of the global financial crisis in 2008.

Shares of Tokyo Electric Power Co. led the declines, plummeting 23.6 percent after two explosions hit the company’s nuclear reactors in Fukushima Prefecture. Shares in Japanese vehicle-makers fell by about 10 percent after they largely suspended domestic manufacturing because of factory damage and power outages. Sony shut eight factories and there were closures reported by Kirin, Asahi and Sapporo breweries, Fuji Heavy Industries, GlaxoSmithKline and Nestlé.

Stocks plummeted despite the Japanese central bank pumping a record amount of liquidity into financial markets in a bid to “pre-empt deterioration in business sentiment”. The Bank of Japan yesterday made 21.8 trillion yen ($US265 billion) available to financial institutions and doubled its asset-buying program to 10 trillion yen in a bid to calm markets.

The Financial Times reported: “Economists generally welcomed the central bank’s move as a measure to quell potential panic over access to funds in the wake of a major disaster. But some said the liquidity injection was not likely to be enough to counter the negative impact of the quake and tsunami on the Japanese economy, already weakened by a strong yen and deflationary pressures.”

Globally, as the Wall Street Journal noted, the Japanese disaster intensified “the ripple effects of the weekend euro-zone debt accord and the continuing crisis in Libya.” Credit Suisse strategist Shun Maruyama in Tokyo told the Journal: “We possibly cannot ignore the impact that this quake will have in terms of geographical span and scale—as well as the psychological impact.”

Because of the closely intertwined character of global production, the shutdowns in Japan will have knock-on effects throughout Asia and the world. Japan remains a critical part of the Asian and global economy despite recently losing its place as the world’s second largest economy after the US to China. It is the biggest source of foreign direct investment for some parts of Asia and a major purchaser of the iron ore, coal, natural gas and other commodities produced in Indonesia, Australia and elsewhere.

Japan is also the world’s No. 3 oil importer, after the US and China. Disruptions in production may limit Japan’s short-term demand for energy, but over time the shut nuclear plants could lead to increased imports of oil, natural gas and coal. Analysts estimate that replacing all of Japan’s nuclear capacity with oil would mean importing 375,000 more barrels a day on top of the current demand of about 4.25 million barrels. 

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