Japanese Tragedy Unlikely To Derail Global Economic Recovery

The past week has been dominated by the tragedy in Japan, with problems at the Fukushima nuclear power station being the focus of attention and driving huge gyrations in investment markets.

From an economic perspective, the cost to the Japanese economy will be huge. The damage bill in terms of property and infrastructure is likely to be at least US$200 billion or three per cent of Japan's gross domestic product (GDP), says Dr. Shane Oliver, head of investment strategy and chief economist at AMP Capital Investors.

AMP is a leading wealth management company operating in Australia and New Zealand, with selective investment management activities in Asia (through AMP Capital Investors) and a growing banking business in Australia.

He said the damage to factories, power supply, transport infrastructure and confidence would also depress economic activity before rebuilding kicks in.

"Our base case is for a 1 percent hit to GDP in the June quarter followed by a rebound in the second half.

"However, this assumes that power shortages only last for a few months and that Japan avoids a major nuclear catastrophe," he told Bernama.

Shane said if there was a full blown nuclear meltdown resulting in significant radioactive fallout across big parts of Japan then the initial negative impact would be much greater.

"Therefore, regardless of the outcome, we remain of the view that the Japanese tragedy is unlikely to derail the global economic recovery.

"First, it's worth noting that none of the massive global disasters of recent times -- Three Mile Island, Chernobyl, the Kobe earthquake, the 2004 Asian tsunami or Hurricane Katrina -- triggered a global recession," he explained.

More importantly, Japan is now only six per cent of global economic activity and so, even if its GDP falls four per cent, this would only detract 0.25 percentage points from global growth or 0.5 per cent at most when multiplier effects are allowed for.

According to Shane, this sort of impact is arguably already discounted by the seven per cent or so fall in global share markets that "we have seen from the highs in February."

Uncertainty in Japan has caused sharp falls and gyrations in global share markets and it is still too early to say that we have seen the bottom yet.

Shane said: "If we are right and the global economic recovery remains intact then what we are seeing is still just a correction and share markets are likely to be higher in three to six months".

In the meantime, monetary easing by the Bank of Japan and joint G7 intervention to weaken the yen are welcomed.

Earlier in the week, the yen reached a record high against the US dollar and if this were to have been allowed to persist, it would only have worsened the earthquake's impact on Japan's economy.