As Japan struggles to deal with aftermath of a massive earthquake and tsunami, economists across the world are trying to calculate the damage to the Japanese and global economies. But only preliminary forecasts are possible at this point. An accurate assessment of the damage, including big changes in some industries, will only be possible after the dust settles.
Pessimists and optimists
Seismologists say that the tectonic processes that unleashed the terrible destruction in Japan are not over. Additional, less powerful earthquakes are possible, which could mean more destruction, more idling in the economy, and, worst of all, more casualties.
The damage caused in Japan could range from $15 billion to over $100 billion, with insurance claims potentially exceeding $50 billion. But this is a very rough estimate.
Experts are divided over the future of Japan’s economy. Some predict a catastrophic economic decline in Japan and a new global economic crisis. Others are convinced that Japan will overcome its problems and could even use the disaster as a chance to achieve an economic breakthrough, as it did after WWII.
The pessimists seem to be on firmer ground. Japan’s sovereign debt currently exceeds 200% of GDP. This combined with a large budget deficit will make it difficult for Japan to raise the money to rebuild its cities and economy.
But there are also grounds for optimism. Although Japan has the world’s largest sovereign debt, this has not provoked the same financial upheaval in this country as in the European Union. Furthermore, the world depends on Japan too much to allow its economy to sink. So Japan could be swamped with foreign investment. And the Japanese government, local companies, and ordinary Japanese people are sure to invest generously in their own country.
Japan is among the world’s largest producers of automobiles and electronic goods, with more than half of the production sites of Japanese companies located outside of Japan. However, Japanese automobile producers still have between 20% and 40% of their plants in Japan, and its electronics producers have always refused to outsource production of the most complicated components.
The disaster has forced Toyota to suspend work at a dozen plants, and Nissan, Honda, Suzuki, Mitsubishi and Mazda have each shut down several plants for the time being. Sony, Panasonic, Toshiba and Fujitsu have also suffered damages and halted production – some because of the earthquake and others because they now lack essential components. Japanese plants in other countries could experience similar problems. Experts are forecasting a rapid increase in prices for electronic components.
Taken together, this could pose two problems to Russia
A shortage of auto components could affect the Toyota assembly plant in Russia, which has been operating since 2007. But there are few other Japanese subdivisions operating in Russia. The larger problem is that declining production in Japan will reduce demand for steel and copper (Japan is the largest importer of these raw materials after China), causing prices to fall. This is bad news for Russian steel exporters.
There may be a silver lining for Russian energy producers and farmers. Relief and reconstruction efforts in Japan will require electricity and fuel, and the country may find itself short on reserves. A significant portion of Japan’s infrastructure has been destroyed. According to various estimates, from five to eight of its oil refineries are not running, and the future of its nuclear power industry is in question.
Russian officials and energy companies have repeatedly stressed the importance of diversifying energy exports. Now they have a chance to make it happen.
The Russian government has announced that it is prepared to redirect about 6,000 MW of electricity from its Far Eastern regions to Japan to aid recovery efforts. It may take two years to lay an underwater cable to deliver the electricity, but Japan’s economy is unlikely to fully recover by that time.
Japan’s agricultural regions have been badly damaged by the disaster, which could lead to persistent food shortages in Japan. This could help Russia regain its standing on the global grain market. After Russia suffered its worst drought in decades last summer, forcing the government to ban grain exports, traders were claiming that Russia would lose its position on the global grain market, and that it would be extremely difficult for Russia to regain it next year even if the harvest is good. Russia has long had its eye on Japan as a potential buyer of grain.
The views expressed in this article are the author’s and do not necessarily represent those of RIA Novosti.