On previous posts we have done a brief analysis on the devastating effects of the earthquake-tsunami combo on the Japanese economy. To have a more general and complete view of the events, one has to look at the other side of the story too, the collateral effects the damage suffered by Japan will have on the global economy. Over the last days we have heard words of relief from Japan's government and from analysts saying that the bite on Japanese GDP will not be as big as thought on first instance. But, no matter how fast the world's third biggest economy can recover from the disaster, the weight of said economy makes it impossible to dismiss the effects it will have in the coming months (and is having as of now) on the march of the global economy.
Countries affected
The first wave to affect the global economy was a logic fund repatriation, specially from Japanese banks and insurance companies in need of liquidity to begin with reconstruction tasks at home. This initial repatriation made the yen go higher instead of immediately falling as expected, but this is not something to fear specially for the rest of the world. What some people are fearing is that Japanese mutual funds, hedge funds and instruments alike began to massively withdraw their positions over the rest of the world to take their money back home. If this movement is done gradually no significant damage would be done, Japanese money would simply be substituted by somebody else's money. But if this repatriation was to be done massively it would pose an important threat, specially for emerging markets. Emerging markets usually rely on bigger economies' capital to fund their growth, to the point where a runaway of Japanese money could partly derail short-term growth expectations for some emerging markets. I am not talking China, Russia or Brazil here which are exposed but big enough to not notice a heavy change. I am talking about smaller markets like South Korea, Singapore, Hong Kong, Taiwan, Malaysia, Thailand, South Africa or Chile.
The extensive portfolio of Japanese investment includes a lot of developed economies too. These should have less trouble dealing with a hypothetic lack of Japanese funding, but in the actual situation every single dollar counts. The most exposed economies are (in no specific order though): USA, Mexico, the Netherlands, Australia, Italy and Saudi Arabia.
You can see a full detail of Japan's international investments (and trade balance) by country at the JETRO, Japan External Trade Organization site.
Some people also expected that Japan's situation would stop the ECB from rising interest rates on the eurozone on April as planned, but that simply is not going to happen. Mr Trichet already stated that inflation is more worrying than Japan for him and they will go on with their plans to stop inflation.
Economic sectors affected
Another point of view to consider when talking about the impact on the global economy is the predominant role Japan played in certain economic sectors. Again, going to JETRO gives detailed information about Japanese investments by sector. Looking at the JETRO data one can see at first sight which sectors Japan prefers. The Japanese weight heavily on the chemical and biotechnology sector and mining, two of the sectors expected to grow the most from my humble perspective, see related post.
Let's focus on the mining sector, as it has a double importance here. Japan is a big importer of raw materials, mainly iron, steel and aluminium for its car manufacturing industry but also silicon and (most importantly) rare-earth metals for electronics. One can expect a decrease on Japanese throughput on the automotive and the electronic sector, not because of the earthquake itself as manufacturers have clearly stated its affection will be low, but as a result of reduced domestic demand because of it. If this is the case, global prices for all these commodities should drop slightly or at least break the rising trend of the latest months, which would be a very good thing...
This could prove very good for Japan's recovery, and for the global economy as a whole, easing a little the inflationary pressure on metallic commodities worldwide.
But maybe the most important of all sectors will be the energy sector. Japan's oil consumption could go down a little due to slower growth, which could help stabilize prices, but what is becoming more clear every day is that this effect (if any) is not going to compensate for the escalation of tension and conflict on the Middle East... Where Japan can have an impact though is in natural gas prices. As the nuclear crisis can halt new nuclear investments in the country, natural gas is the easiest and fastest way to go. Natural gas has lower carbon emissions and is more efficient than coal (the other easy solution countries tend to use), but remember its close relationship with oil (one can consider it a by-product of oil), so at the actual prices it becomes a problem.
In addition, natural gas it is far less powerful and clean as nuclear power, so this temporary shift to natural gas will not come free of charge environmentally either...
One cannot forget the domino effect the nuclear crisis is going to have in other countries too. Germany has already called a 3-month moratorium on its nuclear plans for safety reasons, and other countries aging nuclear plants could see their life shortened because of the Fukushima incident, so this is another sector that can be seriously affected in the short term: nuclear plant construction and maintenance. On the other side, the incident could also trigger projects for renewing plants security and strengthen their maintenance programs.
After this we can conclude the energy sector is not the most affected one by the events at Japan (mining is), but it is the one that will have the most influence on the global economy due to the price distortion it can bring to the natural gas market and the disruption in the nuclear market expected growth. A nuclear growth that was very important itself to diminish the extremely high oil dependency that burdens the global economy whenever oil prices skyrocket. We have to hope these effects to the energy sector to be purely short-term or else we will be putting another rock on the way for recovery.
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