Japan's disruption throws a wrench into world's economic gears

McClatchy NewspapersMarch 15, 2011 

WASHINGTON — The disaster unfolding in Japan provided a stark reminder Tuesday of how interconnected the global economy has become, with the price of stocks and commodities skidding everywhere as investors weighed how long one of the world's economic engines will be sputtering.

Investors fretted over how deep the damage is to manufacturing of automotive and telecommunications equipment in Japan, the world's third-largest economy and America's fourth-biggest trade partner.

Japanese manufacturing is deeply integrated into the U.S. and Chinese economies — the world's two largest — so there's ample reason for worry. How quickly Japan recovers will affect everyone from Australian coal miners who export to Japan, to Chinese manufacturers who assemble parts made in Japan, to U.S. dock workers who handle freight from both China and Japan.

Most experts think Japan's production problems will be short-lived, but not without economic dislocations felt around the globe.

"Natural disasters tend to cause short-term displacements that tend to reverse," said Martin Regalia, chief economist for the influential U.S. Chamber of Commerce. "At some point, we're going to be selling into the Japanese economy equipment and products and resources to get them going again, and that will be positive for those sectors of the U.S. economy that do that."

The prospects of rolling power outages and damage to the Japanese power grid were a main concern globally Tuesday, as investors tried to measure how global trade in oil, natural gas and coal will be affected by the deepening problems in Japan.

Concern about Japan sent the Dow Jones Industrial Average down 296 points initially after Tuesday's opening. Buoyed later by a positive statement from the Federal Reserve, U.S. stocks recovered partially from their initial plunge to send the Dow to a more modest drop of 137.74 points to 11,855.42.

Japan's Nikkei index skidded to close down almost 10.6 percent, a massive drop. Taken with losses on Monday, Japanese stocks have lost almost a fifth of their value since last Friday's earthquake, tsunami and subsequent crisis at several nuclear reactors.

This global financial turbulence affects ordinary Americans in ways they might not even know. Many U.S. mutual funds have significant percentages of their assets invested in Japan. The nation's largest retirement-fund investor, Fidelity Investments, has its Japan Fund invested almost completely in Japan, as well as a Pacific Basin fund with more than one-third of its assets tied up in Japan. Similarly, investment giant Vanguard has a Pacific Stock Index fund with holdings in Japanese companies such as Toyota and Mitsubishi.

In one welcome economic ripple from Japan, the global price of benchmark West Texas Intermediate crude oil for April delivery settled down $4.01 at $97.18 on the New York Mercantile Exchange, as Japan's post-quake drop in demand outweighed fears of unrest in the Middle East.

The price of other commodities ranging from copper and lumber to coffee and sugar also fell on concerns that at least for the next month, there'll be a sharp drop in global demand with Japan on the sidelines.

What's clear is that Japan appears to have lost at least 10 percent of its power production. Not only is there significant damage to several nuclear reactors at the Fukushima Daiichi nuclear power plant, but coal-fired plants in the north were also damaged and coal supplies were soaked by the tsunami.

This all challenges Japan's manufacturing prowess, since industry needs electricity. Already automakers and cell-phone companies have been forced to shutter operations, at least temporarily, because of disruption to their famed just-in-time manufacturing processes; that's where manufacturers don't keep large inventories and instead rely on prompt delivery from suppliers on an as-needed basis.

"For the U.S. companies, for Chinese companies, it could be a problem for a few weeks, or a month. The hardest hit will be autos, telecom — with things like cell phones," said Nariman Behravesh, chief economist for forecaster IHS Global Insight. "But sales of other cars and cell phones that aren't dependent on Japanese components may see a boost."

Another consequence of Japan's woes is that Japanese investment will turn increasingly inward. Japan has traditionally been the second-largest foreign investor in the United States after Great Britain, but it'll need to focus its investment on internal repair and restoration indefinitely now.

Japan was also the second-largest holder of U.S. government debt last year, after China. There are some concerns that Japan's government could stop purchasing long-term U.S. government bonds, driving up the interest rate the U.S. government would have to pay to attract other investors.

"I think the concern here is exaggerated, in the sense that some private investors may want to divest their Treasury portfolio (investments) in an attempt to secure funds. But the impact of that would be for the yen to rise in value; that's the last thing the Bank of Japan and the Japanese government want," said Behravesh. He said that Japan's government would purchase even more U.S. debt if necessary to drive down the value of its yen against the dollar in order to help Japanese exporters at such a crucial time.

Trade flows are also sure to be impacted. There's likely to be at least a temporary drop in freight moving through bustling U.S. West Coast ports, such as Los Angeles-Long Beach, San Francisco and Seattle.

"We're trying to avoid the speculation. We're just kind of waiting to see if there are ship diversions, rerouting, and how affected the ports that are not damaged will be," said Phillip Sanfield, a spokesman for the Port of Los Angeles.

Most of the port's trade with Japan, which accounts for 15 percent of the cargo moving through Los Angeles and lags only trade with China, is with the ports of Tokyo and Kobe, which appear to be back in operation. Only 3 percent of the port's trade, measured in value, was with Sendai and other northern ports that were heavily damaged.

Global energy markets will have to adjust to new conditions in Japan, which generates about a third of its electricity from coal, about a quarter from nuclear plants and another quarter from natural gas. Australia and Indonesia are the largest coal suppliers to Japan, and although U.S. coal exporters are not big players there, they are expected to benefit, as Japan needs more coal and natural gas to power its plants.

U.S-Japan Trade At a Glance

Japan is the fourth-largest U.S. trading partner, after neighbors Mexico and Canada and the Asian power, China. Japan took in 4.8 percent of U.S. exports in 2009, the last full year for which data is available. U.S. manufacturers of medical equipment, aircraft and machinery depend heavily on Japanese purchases, as do U.S. farmers and cattlemen.

U.S. imports of Japanese goods accounted for 6.2 percent of all imports into the United States in 2009. Americans purchase imported cars and trucks from Japan, as well as machinery and components for use in final manufacturing or assembly.

The two countries invest heavily in each other as well. The stock of U.S. foreign direct investment in Japan stood at $79.2 billion in 2008, the last full year for available U.S. government data. Japanese foreign direct investment in the United States was three times that at $259.6 billion during the same year, according to State Department statistics.

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