Impact on Japanese Economy The devastation caused by the earthquake and tsunami in Northeast Japan has had a tremendous negative impact on the Japanese economy. Not only has there been tragic loss of life on a large scale, but the coastal cities and towns, as well as physical infrastructure of Northeast Japan have been severely damaged. Early estimates of the total cost of reconstruction are around US$270 – 300 billion but could be even higher once detailed assessment of reconstruction costs has been done. The impact on Japan’s economic growth in the first half of 2011 will be very negative, but as reconstruction gets under way, economic growth is actually expected to rebound strongly in the second half of 2011 and during 2012.
Overall, the impact of the earthquake is expected to slow Japanese GDP growth to only 0.5 percent in 2011, due to the impact of lost production in March and Q2 2011, but as reconstruction gets under way, GDP growth in 2012 is expected to be significantly stronger, growing at 3.5 percent in the 2012 calendar year, although this assumes that the radiation risks from Fukushima will be able to be brought under control soon.
The earthquake and large aftershocks brought much of Japan’s manufacturing sector to a halt in the second half of March, with the many precision manufacturing plants forced to shut down due to the impact of the earthquakes on their ability to conduct operations. The Japanese auto sector virtually ceased production for many days after the earthquake, with estimated lost auto production in Japan in March alone of more than 500,000 autos.
The problems of restoring normal production are complicated by severe damage to some key plants for auto and electronics industry suppliers in Northeast Japan, which is expected to disrupt supply chains. Furthermore, an estimated 10 percent of Japanese electricity generation capacity has been damaged due to the disaster, and this is causing rolling power blackouts that are expected to continue at least until the end of April and probably even longer, due to the difficulties of restoring production given a key nuclear facility has been completely destroyed and other coal-fired power stations have also suffered substantial damage that will take many months to repair.
Transmission Effects to Asean For Southeast Asia, there are significant vulnerabilities expected in coming weeks as a result of the Japanese disaster, due to the crucial importance of Japan’s auto and electronics supply chains for many Southeast Asian manufacturing sectors. A number of Asean economies have large electronics industries, including Thailand, Singapore, Malaysia, Vietnam and the Philippines. Due to their reliance on Japanese electronic components and parts for significant segments of their auto and electronics sectors, there are significant risks that supply chain disruptions will have transmission effects to the Asean economies in coming weeks as inventories held are run down.
As reconstruction gets under way in Japan in the second half of 2011 and during 2012, this may start to have more positive transmission effects for Southeast Asia, as Japanese growth picks up momentum, and starts to generate positive transmission effects via trade and investment flows in the rest of Asia. However, the recent retreat of some industrial raw materials prices due to anticipated weakening Japanese growth is likely to be reversed later this year, as the Japanese growth rebound pushes commodity prices higher, putting pressure on emerging Asian central banks to tighten monetary policy further.
Southeast Asian countries are also vulnerable to similar supply chain disruptions to their auto and parts production industry, with Thailand, Indonesia and Malaysia having significant auto manufacturing sectors that use Japanese auto parts and components not only in Japanese auto subsidiaries, but also in some non-Japanese auto plants due to the integrated nature of global supply chains.
Key components affected by the disaster include:
• components such as integrated circuits, sensors, semiconductors and LCD screens;
• petrochemical feedstock such as some ethylene products and synthetic rubber;
• powertrain components such as gears, clutch packs and solenoids;
• specialty materials, such as silicon, for which 60 percent of global capacity is sourced out of Japan and is badly affected by damage to key plants in NE Japan.
The auto industry in Asean has some degree of supply chain vulnerability to Japan, although the Korean auto industry is expected to be relatively less affected and indeed may gain some competitive advantage in the near-term due to disruption to production from Japanese auto plants as well as Japanese subsidiaries worldwide......................
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