Asia Likely to Suffer Economic Repercussions From Japan Earthquake

  • Earthquake to have major impact on industrial production in Japan
  • Spillovers to Asian economies through global supply chain
  • Despite accelerating growth in 2012, downside risks remain large
  • In an analysis of the likely effects of the disaster, IMF economists suggest industrial production will be particularly hard hit in Japan, with a likely ripple effect across productive sectors through the supply chain.

    “The impact of Japan’s natural disaster is also likely to be felt well outside its geographic borders, mainly through trade channels … however, a stronger impact could be felt on the supply side,” says the report.

    Disruptions in global supply chain

    The economists suggest prolonged disruptions to production in Japan could affect other economies along the global supply chain, particularly in those industries where Japan provides a large share of global supply such as in the production of silicon wafers for microchips.

    Asia’s economies are highly integrated through cross-border production networks, and Japan remains the second most important source of imported intermediate inputs in the region. It accounts for about 10-15 percent of the value added produced in some Asian economies, including Malaysia, Thailand, and Taiwan Province of China.

    In the short term, the report predicts that firms could use existing inventories and then, over time there could also be a switch to alternative suppliers. “Although Japan’s status as a highly specialized supplier of electronic components and capital goods suggests limits to this strategy,” say the economists.

    Comparisons with Kobe

    The report draws comparisons with the Kobe earthquake of January 1995 when industrial production declined by 3 percent in the first month after the earthquake, but rebounded quickly before reaching pre-quake levels within one quarter.

    “Reconstruction led to an investment boom and, as employment rose and confidence strengthened, retail sales began to rise again after one quarter.”

    Following the Kobe disaster, GDP growth picked up from 0.9 percent the previous year to 1.9 percent for the whole of 1995.

    But the report points out a number of critical differences between the Kobe earthquake and the more recent disaster, including the scale of the two events—initial estimates of damage to infrastructure from the...

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