Monday, March 21, 2011

Japan’s GDP may slow, World Bank says

Japan's real GDP growth will slow, the World Bank has said in its assessment of the situation following a massive earthquake and tsunami which devastated a large part of the country. However a report released on Sunday suggests that as reconstruction begins there will be a gradual recovery towards the middle half of 2011.

The World Bank in its latest East Asia and Pacific Economic Update says it may be too early to make a full assessment, but Japan's past experience suggests an accelerated reconstruction effort, and the short term impact on the economies of developing East Asia is likely to be limited.

The risks of climate change and natural disasters complicate East Asia's quest for continuous rapid growth, the report says. However every natural hazard does not automatically lead to catastrophic loss of life and property. The recent tragic earthquake in Japan with a magnitude 9, the most powerful in the country's recorded history, and the subsequent tsunami are a stark reminder of the dangers from natural hazards and the key role of careful and thorough investments the authorities have made in seismic safety and emergency preparedness. The extent to which countries in the region will be affected economically will vary and depend on factors that will only become clear in the coming weeks.

Basing its assessment on past history, the World Bank says real GDP growth will likely be negatively affected through mid-2011. Although growth should though increase as reconstruction efforts accelerate, this may take as long as five years, the organisation warns. While it is too early to estimate accurately, the cost of the damage is likely to be greater than the damage caused by the 6.9 magnitude Kobe earthquake in 1995. Private insurers will likely bear a relatively small portion of the cost. This will leave most of the reconstruction costs to households and the government.

The temporary growth slowdown in Japan will have only a modest short-term impact on the region, the World Bank asserts. After the Kobe earthquake, Japan's trade slowed for only a few quarters before it began to recover. Within a year, imports had recovered fully and exports had rebounded to 85% of pre-quake levels.

But this time around there is widespread disruption to production networks. This has especially hit the automotive and electronics industries which could pose problems, at least in the medium term.

Japan is a major producer of parts, components, and capital goods which supply East Asia's production chains. In Thailand, exporters of cars report that current supplies of components imported from Japan will likely last through April. Some plants in Japan are already experiencing shortages in parts sourced from the northeast. In electronics, Korean firms are facing higher prices for memory chips, in part because Japan accounts for up to 36% of global production and that production is now disrupted. Prices have already risen by more than 20% in some categories. China and the Philippines are more connected to developments in Japan than the rest of East Asia and there have been reported price hikes of memory chips in China [BBC].

In the short to medium-term, energy producers, such as Indonesia, Malaysia, and Vietnam, could benefit from higher energy prices, as Japan begins to rebuild and tries to close the energy gap caused by the loss of nuclear capacity. Longer-term demand for fossil fuels could remain high as other nations revisit plans for their nuclear electricity production.

The situation still remains volatile however as the situation at the Fukushima nuclear plant has yet to be made entirely stable [FT].

The World Bank provides only a preliminary analysis on the implications for the region with a focus on trade and finance. It does however, points to uncertainties and ongoing challenges posed by the unfolding situation involving nuclear reactors in Japan. As the country picks up the pieces following the devastating earthquake and tsunami markets around the world will be strongly focused on Japan in the coming weeks [Guardian].

tvnewswatch, Beijing, China

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