Japan after the earthquake

A Hot Tip about Foreign Direct Investment in Japan

Last updated: 31 Mar 2011

Japan after the natural earthquake and through the economical shake

No one can ignore what happened in Japan, one of the most advanced “technologyzed” countries, where its technological and electronics services and products are all over around the world such as Sony and Toshiba, not to mention thousands of names and brands that we all use.
What happened in Japan is a international disaster and not just national Japanese problem, and in addition to the sad incidents of injuries, lost and dead, the earthquake has really affected and “damaged” the Japanese economy, and left the international economy and business in wonder about what future “repercussions” might happen.

And for more illustration, and as per the report of the international pulse of economies, March 15, 2011,  here some facts about the Earthquake and Tsunami that hit Japan:
It is he most powerful earthquake to hit Japan in 100 years struck at 2:46pm JST on March 11, 2011.
a. Magnitude: 9.0 (upgraded from 8.9).  Fifth strongest earthquake in the world since 1900.
b. Epicenter: 130km east of Sendai in Pacific Ocean ~32km deep.  Area known as Japan Trench Subduction Zone.
c. Casualties: Likely to reach over 25,000 dead.  Over 400,000 people left homeless.
d. Geophysical Impact: Parts of Japan near epicenter said to have moved 2.4 to 3 meters closer to the United States

The 2011 Sendai earthquake and tsunami that struck was an 8.9–9.0 MW mega thrust earthquake off the coast of Japan on Friday 11 March 2011 at 14:46 JST, knowing that the epicenter was reported to be 130 kilometers off the east coast of the Oshika Peninsula, T?hoku, with the hypocenter at a depth of 24.4 km
The earthquake triggered tsunami warnings and evacuations along Japan's Pacific coast and in at least 20 countries, including the entire Pacific coast of North America and South America. It triggered extremely destructive tsunami waves of up to 10 meters that struck Japan after the quake, with smaller waves after several hours in many other countries. In Japan, the waves are reported to have traveled up to 10 km inland.
The Japanese National Police Agency has officially confirmed 1,897 deaths, 1,885 injuries, and 3,002 people missing across sixteen prefectures, but estimated numbers are far higher, ranging from thousands to tens of thousands dead. The earthquake and tsunami caused extensive and severe damage in Japan, including heavy damage to roads and railways as well as fires in many areas, and a dam collapse.
Around 4.4 million households in northeastern Japan were left without electricity and 1.4 million without water. Many electrical generators were taken down, and at least two nuclear reactors partially are melting down, which prompted evacuations of the affected areas, and declaring state of emergency. Both reactor plants believed to have partially melted down have experienced a chemical explosion extensively damaging their buildings, but the integrity of the inner core-containment vessel was not compromised and no highly radioactive release from the plants have occurred.
Residents within a 20 km radius of the Fukushima I Nuclear Power Plant and a 10 km radius of the Fukushima II Nuclear Power Plant were evacuated. Early estimates from AIR Worldwide place insured losses from the earthquake and tsunami at US$14.5 billion to US$34.6 billion.
Chief economist for Japan at Credit Suisse, Hiromichi Shirakawa, said in a note to clients that the estimated economic loss may likely be around $171–183 billion just to the region which was hit by the quake and tsunami. The Bank of Japan offered a combined 15 trillion yen ($183 billion) to the banking system on 14 March 2011 to stabilize financial market conditions.
The estimates of the Sendai earthquake's magnitude made it the most powerful earthquake to hit Japan and one of the five most powerful earthquakes in the world since modern record-keeping began in 1900. Japanese Prime Minister Naoto Kan said that "in the 65 years after the end of World War II, this is the toughest and the most difficult crisis for Japan." The earthquake moved Honshu 2.4 meters east and shifted the earth on its rotational axis by almost 10 centimeters.
The world's 7th strongest earthquake has destroyed Japan's economic recovery gains. The quake occurred at the time when the world's third largest economy (after US and China) was doing well in the recovery.
It is very obvious that the earthquake has resulted in a major negative impact on the Japanese economy, which is sad but true. Those negative impacts include effects on the Japanese local currency (YEN) and its value against other major currencies especially the US dollar. Coming into sequence will be the impacts on the Japanese stock and financial markets and the production capacity of Japanese companies and industrial factories, leading to drops in the GDP along with disturbed trade balance levels.
It is also worth mentioning that the Japanese standard of living will tend to decrease some how where the Japanese people will tend to focus on there main needs and focus their consumption habits on basic needs during this devastating crisis, which will in return lower the levels of domestic spending affecting the economy from another perspective.
Stocks in Japan extended losses as trading resumed though the worst earthquake on record in the third-biggest economy, and might have the power to dent the two-year bull market in global equities.
The Nikkei 225 (NKY) Stock Average dropped 6.2 percent, the most since December 2008, to 9,620.49 on Monday and followed with 11% slump on Tuesday, the worst two-day drop since 1987. The Standard & Poor’s 500 Index retreated 0.6 percent at 4 p.m. in New York. Lost production from the Tohoku region where the 8.9-magnitude quake struck might not be enough to spur a recession, Bank of America Corp. said. The Bank of Japan said it will pump a record 15 trillion yen ($146 billion) into the financial system.
Global stocks ended little changed on March 11 as declines of 0.7 percent or more in China, Hong Kong and Australia were offset by a 0.7 percent advance in the Standard & Poor’s 500 Index. The MSCI All-Country gauge rose less than 0.1 percent to 336.73. U.S. shares were boosted by a 1.5 percent drop in oil spurred by speculation the temblor would curb demand in the world’s third-biggest oil-consuming country.
Investors are trying to assess whether the quake will hurt Japan’s economy enough to derail worldwide growth spurred by more than $12 trillion pumped into the financial system by governments and central banks since 2008. Global gross domestic product is forecast to expand 4.4 percent this year and 4.5 percent in 2012, according to the Washington-based International Monetary Fund.
Japan accounted for $5.4 trillion, or 8.7 percent, of world GDP in 2010, when the global economy expanded by 5 percent, the fastest pace since 2007, the IMF said. Japan may expand 1.5 percent this year, the fifth-worst rate among the world’s 24 developed nations, according to the IMF’s (International Monetary Fund) World Economic Outlook from October.
The earthquake is the latest shock to an economy that has the fastest-aging population in the developed world and has been mired in deflation for much of the past two decades. The Nikkei 225 has fallen 74 percent since December 1989 as land prices tumbled to about half their peak levels in the late 1980s. The country’s real GDP grew at an average 0.8 percent pace in the past 10 years, compared with 1.7 percent in the U.S.
The benchmark index for Japanese stocks lost 3 percent last year as the yen at its strongest annual average level against the dollar since at least 1971 dimmed the outlook for export earnings. The country depends on demand from China and the U.S., the destination for 35 percent of Japanese shipments.
Japan avoided an economic contraction following the 1995 Kobe earthquake that killed more than 6,000 people because factories from outside the affected region were able to offset lost production, according to a March 11 research note from Bank of America in Tokyo. Extra supply capacity may limit the quake’s drag on GDP to as little as 0.2 percentage points, they said.
The ruling Democratic Party of Japan has few options to offset growth that is lost to the quake. The Ministry of Finance projected in January that government debt will rise 5.8 percent to a record 997.7 trillion yen in the year starting April 1.
Bank of Japan interest rates are near zero and the country’s borrowing costs are the lowest in the developed world. Government bonds maturing in 10 years yield 1.27 percent, while the yen has depreciated against 12 of the 16 most-traded currencies this year, dropping 4.8 percent versus the euro and 0.9 percent against the dollar.
Japan’s economy shrank more than the government initially estimated in the fourth quarter because of a downward revision to capital investment and consumer spending. Moody’s Investors Service lowered its outlook on Japan’s Aa2 debt rating last month on concern about the government’s ability to tackle the world’s biggest public-debt burden.
The quake hit the north-east section, responsible for 8% of Japan's GDP. It damaged or closed down key ports, and some airports shut briefly. This could disrupt the global supply chain of semiconductor equipment and materials. Japan manufactures 20% of the world's semiconductor products, including NAND flash, an indispensable electronic part of Apple's iPad. Japan also supplies the wings, landing gears and other major parts of Boeing's 787 Dream liner.
Automakers Toyota, Nissan, Honda, Mitsubishi and Suzuki temporarily suspended production in Japan until at least Monday. A total of 22 plants, including Sony, were shut in the area.
Although the Bank of Japan will do its "utmost" to provide market liquidity and ensure the stability of financial markets, the long-term impact will be negative on the country's struggling economy. Although rebuilding will lift the economy a bit, it will be outweighed by the probable increase to the national debt -- already twice as big as Japan's annual economic output. Moody's warned it may cut Japan's credit rating, increasing the country's cost to service its debt.

Posted: 29 March 2011, last updated 31 March 2011

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Japan after the earthquake   By Waleed Dirani, Future Horizon Global Center