Disaster Could Cost Japan $235 Billion

World Bank expects Japan's GDP growth to pick up after mid-2011 as reconstruction could take five years.

Japan's massive earthquake and tsunami could cost its economy up to $235 billion, or 4% of output, and reconstruction may take five years, the World Bank said on March 21.

"If history is any guide, real GDP growth will be negatively affected through mid-2011," the World Bank said in its latest East Asia and Pacific Economic Update report. But growth should pick up in subsequent quarters "as reconstruction efforts, which could last five years, accelerate", it added.

The lower end of the World Bank's estimate of the twin disasters' impact was $122 billion, equivalent to 2.5 % of GDP.

Since the natural disasters struck on March 11, Japan has also had to grapple with a nuclear power plant crisis in Fukushima, but the World Bank did not mention the atomic issue in its assessment of the economic damage.

Japanese financial markets were closed on March 21y. March 18y, Japan and its fellow G7 rich nations vowed to intervene in currency markets to stem the yen's rise and support Japan's economy. The dollar immediately strengthened after the move and was trading at 80.90 yen in morning Asian trade on March 21, up from 80.59 in New York on March 18.

Japan's GDP grew 3.9% in 2010, when it was overtaken by China as the world's second-biggest economy. But Japan has been mired in a malaise for years, since a property bubble imploded in the early 1990s.

Vikram Nehru, the World Bank's chief regional economist, said the Japan disasters would affect the rest of Asia but it was too early to give estimates of the cost to the region. "In the immediate future, the biggest impact will be in terms of trade and finance," he said.

The World Bank noted that after the 1995 Kobe earthquake, Japan's trade slowed only for a few quarters, with imports recovering fully within a year and exports rebounding to 85% of pre-quake levels in the same period. "But this time around, disruption to production networks, especially in automotive and electronics industries, could continue to pose problems (beyond one year)," the report added.

The World Bank said developing East Asia's trade with Japan accounted for about 9% of the region's total external trade in the past five years. It estimated exports from the region could slow by 0.75%-1.5% if Japan's GDP shrank 0.25%-0.5%.

The auto and electronics industries are already feeling the impact from Japan's deadliest natural disaster since 1923, with production at major companies including Toyota and Sony disrupted. Thai car exporters who buy Japan-made parts only have enough stocks to last until April while factories in the disaster-hit country are experiencing parts shortages sourced from the devastated northeast coastal region. GM Korea, the South Korean unit of General Motors, plans to scale back production as it braces for a possible lack of Japanese parts.

In the electronics sector, prices of memory chips have shot up by more than 20% in some segments, the World Bank said. Japan supplies up to 36% of the world's memory chips.

The World Bank also indicated that reconstruction efforts by Japan may affect East Asian countries holding yen-denominated liabilities, and the foreign direct investment (FDI) by Japanese firms to these economies. It said one-quarter of the region's developing economies have long-term debt denominated in yen ranging from 8% in China to roughly 60% in Thailand.

"A one percent appreciation in the Japanese yen translates into a $250 million increase in annual debt servicing on yen-denominated liabilities held by East Asias developing countries," the World Bank said. "At this stage, it is unclear how the disaster will affect Japanese outward FDI, but it may dent the pace of overseas investment as the country's focus turns inward on reconstruction."

Copyright Agence France-Presse, 2011

See Also

Analyst: Earthquake Poses Minor Threat to Global Economy

Japan's Steel Industry Assesses Damages From Tsunami

Bank of Japan Unleashes Record Funds

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