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Asia Economy Last Updated: Mar 21, 2011 - 3:47 PM

Impact of quake on Japan’s growth likely to be ‘temporary’; ‘Limited impact’ on strong regional economy says World Bank
By Finfacts Team
Mar 21, 2011 - 3:20 AM

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Japan’s real GDP growth will slow, but the slowdown will likely be temporary, as a result of the earthquake and tsunami and growth should start picking up after mid-2011 as reconstruction efforts get underway, says the World Bank in its latest East Asia and Pacific Economic Updatereleased today. While it is still too early for a full assessment, the bank says 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 death toll is expected to have exceeded 20,000 people.

The New York Times reports Japan appeared to make moderate progress in stabilizing some of the nuclear reactors at the stricken Fukushima Daiichi power plant on Sunday, but at the same time it disclosed new signs of radioactive contamination in agricultural produce and livestock.

Steven Chu, the United States secretary of energy and a Nobel laureate in physics, said on 'Fox News Sunday,' that “with each passing hour, each passing day, things are more under control.”

The English language service of the state television broadcaster, NHK, reported that Japan's health ministry is urging the people of a village in Fukushima Prefecture not to drink the tap water, in which higher levels of radioactive materials were detected on Sunday. The ministry says, however, that drinking it does not pose any immediate health risk.

Tap water tested at Iitate Village in Fukushima Prefecture showed more than triple the level of radiation allowed by the government.

The health ministry says 965 becquerels of iodine-131 were detected in the water, which is 3.2 times the standard. The legal standard is 300 becquerels per kilogram.

On the matter of higher levels of radiation than the legal standard detected in vegetables produced in Gunma, Tochigi, and Chiba prefectures, the health ministry said these are not of levels that could affect one's health 'immediately.'

The World Bank report, titled Securing the Present, Shaping the Future, was finalized in the weeks prior to the disaster in Japan. In new research prepared since the quake and tsunami struck Japan, the World Bank provides preliminary analysis on the implications for the region with a focus on trade and finance. However, the analysis points to uncertainties and ongoing challenges posed by the unfolding situation involving nuclear reactors in Japan.

"Clearly given Japan's importance in East Asia, the tragic events unfolding will be felt in the region. But it's far too early to give an accurate assessment of the likely damages," said Vikram Nehru, World Bank chief economist for the East Asia and Pacific region. "At this stage, we expect the economic impact of this disaster on the East Asian region to be fairly short-lived. In the immediate future the biggest impact will be in terms of trade and finance. We expect growth in Japan will pick up as reconstruction efforts accelerate."

On trade, the world Bank says if the Kobe earthquake of 1995 is to serve as a historical guide, Japan’s trade slowed only for a few quarters; Japanese imports recovered fully within a year and exports rebounded to 85% of pre-quake levels. But this time around, disruption to production networks, especially in automotive and electronics industries, could continue to pose problems.

On finance, about one-fourth of East Asia’s long-term debt is denominated in yen, ranging from about 8% in China to about 60% in Thailand. A one percentage appreciation in the Japanese yen would translate into about a $250m increase in annual debt servicing on yen-denominated assets held by East Asia’s developing nations.

Looking back on 2010, the report characterizes the region’s output growth as surprisingly strong, with real GDP growth amounting to 9.6% for the year as a whole. Growth was also broad-based: six countries in developing East Asia grew by 7% or more in 2010. This is largely the result of sustained monetary and fiscal stimulus measures and stronger growth in demand abroad. Real GDP growth is projected to settle to about 8% in 2011 and 2012.

The outcome in 2011 is likely to be more subdued as fighting inflation becomes a short-term priority. Lowering inflation presents particularly difficult policy choices for middle-income countries in East Asia, where the application of monetary policy has been complicated by a surge in portfolio capital inflows and rapidly increasing food and commodity prices. The bulk of the adjustment burden will likely rest on fiscal policy, where the challenge lies in lowering deficits more rapidly while creating the fiscal space to finance critically needed infrastructure and assure necessary social investments and cash transfers to the poor.

The report also examines the region’s outlook in the medium to long term, asking whether it can harness opportunities and tackle challenges to proceed on a path of rapid and sustained growth. The earthquake and tsunami in Japan serve as a stark reminder of one of East Asia’s greatest challenges - - its vulnerability to natural disasters. The region covers half of the earth’s surface, is home to 59% of the world’s population, but has had over 70% of the world’s natural disasters. East Asia’s urban centres, increasingly where output and population are concentrated, are under threat of extreme weather, rising sea levels and other hazards. Countries must work to build innovative and disaster resilient cities, ensure environmental sustainability, and adapt to the effects of climate change.

The devastating quake and tsunami are unlikely to change Japan's 20-year downtrend, says Takuji Okubo, Japan chief economist, Global Economics Research at Société Générale. He explains why:

With the world’s economic center of gravity shifting gradually toward East Asia, the region must also assume new responsibilities, contributing more toward global public goods. "East Asia can continue to grow rapidly if it is willing to make the tough decisions needed to ensure macroeconomic stability in a volatile global economic environment. At the same time, it must address medium term challenges such as accelerating regional economic integration, reducing economic and social inequalities, and lowering the carbon intensity of production and consumption," said Vikram Nehru.

The overall impact of the Japan quake on Asian economies should be quite limited as Tomo Kinoshita, Deputy Head of Economics at Nomura International, believes the natural disaster will only reduce Japan's 2011 GDP by 0.4%:

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