Are markets underestimating the global economic impact of the tragedy in Japan?
The untold number of deaths is, of course, the most important factor here, and this post is not meant to shift the focus from the destruction and horrendous loss of life.
But some economists believe the devastation could ripple through to other economies. Major companies are shut down, and supply chains disrupted amid an already uncertain climate.
"A recession and possible fiscal crisis in Japan is another important threat to add to the long list of economic, political and financial uncertainties that threaten the sustainability of the global recovery," said Julian Jessop, the chief international economist at Capital Economics in London.
While Japan's stock market plunged today, others were less affected, and Mr. Jessop wonders whether investors are looking far enough ahead.
"For a start, private domestic demand was already fragile before the disaster struck and the public finances in a dire state," Mr. Jessop said in a research report.
"The chances of a rapid economic recovery are slim but the chances of a major fiscal crisis have increased. Given Japan’s importance as a global investor this could have major repercussions around the world."
For Japan itself, some observers believe Japan's economy could shrink in the first half of this year, but rebound in the second half on reconstruction efforts. The outlook for Japan will be cominated by five factors, said Mohamed A. El-Erian, the chief executive officer of PIMCO:
- Growth will tumble in the immediate aftermath before "rising sharply" on reconstruction.
- Disruptions to supply chains and the loss of inventories "will cause shortages and inflation to spike temporarily" from low levels.
- Japan's deficit and overall debt will climb "meaningfully" given lost revenues and emergency spending.
- The Bank of Japan will ease policy, supplying "extraordinary credit and liquidity facilities.
- Japan will receive transfers from other countries, including repatriation of funds held by Japanese outside the country.
"Japan is a rich country that is also able to borrow at relatively low interest rates," he said.
"As such, it definitely has the ability to rebound economically from these horrible natural disasters. Moreover, in a really good recovery scenario, Friday’s dreadful shock could even be a catalyst for internal political unity and for overcoming what has been two disappointing decades of economic performance. Indeed, a prolonged period of high and sustained growth is key to Japan’s handling of its domestic public dynamics."
He noted that the rest of the world stands with Japan in hoping for a quick rebound, as governments and individuals pull together to help.
"This international reaction is driven by one of the noblest of all human feelings, that of empathy," he wrote on PIMCO's website.
"Yet there is also an element of self interest. Japan is among the very largest economies in the world; it plays an important role in global trade and cross border financial flows; and its voice is influential in multilateral policy deliberations.
"The world has a shared interest in the economic recovery of this systemically important country. The good health of Japan is central to a robust global economy that generates lots of jobs and enhances productivity."