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Analysis/Comment Last Updated: Mar 16, 2011 - 4:06 AM


Japan: The economic consequences of Disaster; Nuclear crisis moves closer toward catastrophe; Nikkei falls 10.5%
By Finfacts and Professor Peter Morici
Mar 15, 2011 - 6:13 AM

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Japanese Prime Minister Naoto Kan addresses the stricken nation on Tuesday, March 15, 2011.

Japan: The economic consequences of the massive earthquake last Friday off the coast of Japan are taking a backseat as the crisis at two nuclear plants is moving closer to catastrophe. On the Tokyo Stock Exchange, the Nikkei 225 closed down 10.5% Tuesday.

An explosion Tuesday, damaged the vessel containing the nuclear core at one reactor and a fire at another is spreading large amounts of radioactive material into the air, according to the statements from the Japanese government.

The prevailing winds are moving most of the radioactivity plume out over the Pacific Ocean, rather than over populated areas but workers have been withdrawn from the site of Tuesday's explosion, which must be a huge worry for the population in the greater area .

Japanese Prime Minister Naoto Kan said Tuesday that there is a high risk of elevated levels of radiation from a reactor at the Fukushima nuclear power plant and he urged people within 30 kilometers of the plant to stay indoors.

"Substantial amounts of radiation are leaking in the area," Kan said on television at 11 a.m. in Tokyo. "We are making utmost efforts to prevent further explosions or the release of radioactive materials," he said.

NHK TV service in English

Comment by Dr. Peter Morici on the economic consequences:

The toll in human misery wrought by the tsunami and earthquakes in Japan test the imagination of economists but the effects on Japan’s GDP and wealth are a different matter.

GDP, which measures goods and services produced, will immediately dive in Japan and stay lower through the second and into the third quarters of 2011, but will then surge as construction and spending on capital equipment to rebuild drives up growth.

Overall, however, Japan will be poorer, for this disaster. Lost infrastructure, factories and the like will be replaced but wealth is the sum of what citizens and governments own—those include physical assets like those just noted and financial wealth, namely securities and cash. Rebuilding will run down Japan’s financial wealth to replace lost physical assets.

As estimates of the damage emerge, those totals are real deadweight losses to wealth. To the extent Japan must run down financial assets and bring home foreign investment to rebuild, the net wealth of Japan is permanently reduced.

Generally, after three years or so, the impact on GDP is small—production is lost in the first two quarters but more goods and services are produced in later quarters to rebuild. Often the net loss in GDP, from even the largest natural disasters, comes to no more than one percent of GDP in large advanced industrialized countries.

Replacing lost production and rebuilding lifts output in a nation’s geographic areas less affected by the disaster to provide the resources to rebuild and compensate for lost output in the most affected region.

However, this time could be different. Japan has encountered two disasters—the tsunami and earthquake, and the nuclear explosions—and globalization may make Japan more vulnerable rather than in the past.

The double whammy has the potential to keep the Japanese economy shut down longer and globalization offers Japan’s export customers alternatives they might not have enjoyed a decade or two ago. Hyundai and Ford now are good substitutes for Toyota’s cars, and even more so, Caterpillar tractors made in China can replace Komatsu’s land movers.

The pause and uncertainty effected by the nuclear shut down will cause production to rev up more outside Japan and take longer to return to full capacity inside the country. Longer term the nuclear disaster will accelerate the implosion of Japan’s economy caused by an aging population, just as Hurricane Katrina caused people and activities to permanently leave more economically depressed areas of the Gulf Region permanently for faster growing places in the United States.

Some of New Orleans’ and Mississippi’s lost capital will never be restored - - it went elsewhere in the United States. For Japan’s disaster stricken economy that elsewhere may be other places around the world.

For the global economy, the nuclear disaster in Japan will cause more delay in reducing dependence on oil from the politically volatile Middle East. Wind, solar and other alternatives hold great promise but nuclear still offers the safest, large scale option around. The problem is the loss of life associated with nuclear failures gets concentrated, even if it is much smaller over time per BTU produced, at events like Fukushima. That latter will increase hesitation around the world about building nuclear plants and keep the global economy in the grip of oil longer.

This time, the path to recovery will be tougher for Japan, and for the global economy, ripped by the Great Recession and high priced oil, the path of recovery will be inexorably altered.

John Rothfield, senior director, Australia economics at Merrill Lynch, assesses Japan's response to its worsening nuclear crisis:

Ryoji Musha, president of Musha Research, says further currency intervention by the Bank of Japan is possible:

Peter Morici,

Professor, Robert H. Smith School of Business, University of Maryland,

College Park, MD 20742-1815,

703 549 4338 Phone

703 618 4338 Cell Phone

pmorici@rhsmith.umd.edu

http://www.smith.umd.edu/lbpp/faculty/morici.html

http://www.smith.umd.edu/faculty/pmorici/cv_pmorici.htm

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© Copyright 2011 by Finfacts.com

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