Aiko Musashi carries personal belongings from her destroyed home on March 18, 2011 in Kesennuma, Japan.Paula Bronstein
Japan's struggle to avert a nuclear disaster and prepare for a reconstruction of epic proportions is one more risk for a global economy already grappling with mounting risks.
The threats to the fragile recovery were already rising before the devastating earthquake and tsunami brought the world's third-largest industrial economy to its knees.
And they span the globe - from conflict and oil disruptions in the Middle East and rising inflation in China and other high-growth emerging economies to continuing debt woes in Europe and persistent weakness in U.S. housing and employment, whose recovery is essential to any sustained U.S. rebound.
Adding to the wall of worry, governments have pulled the plug on massive stimulus programs, which played a crucial role in turning around economic fortunes in the wake of the 2008 financial meltdown and ensuing recession.
In their place have come a wave of austerity measures and tighter monetary policies, forced by financial circumstance, political pressure or, in the case of China and India, fears of runaway inflation.
Put it all together and "there is no logical reason" why the global economy will not slow markedly this year, warns Robert Kessler, head of Kessler Investment Advisors in Denver, who advises large corporations and institutions around the world on U.S. Treasury bond investments.
The green shoots of recovery that sparked optimistic forecasts last summer have been buried by a dark winter of growing geopolitical and economic discontent.
"Some time in the next few months, we will be seeing brown shoots again," Mr. Kessler says. "You have a world that is going through a tremendous amount of turmoil."
Unrest in Libya and the Middle East has sent oil prices soaring, triggering concerns about high costs hurting a host of industrial sectors. "Persistent high oil prices around $100 a barrel will weaken the global economic recovery," hitting the auto industry, agriculture, airlines and travel in particular, said a report Friday by Moody's Investors Service.
Since exiting the recession, the global economy has relied in no small part on China's roaring growth, but worries about continued rapid expansion are increasing. The country is taking steps such as raising interest rates and cooling lending to tackle inflation and slow the economy, setting a long-term growth target of 7 per cent. That's still strong, but a far cry from the 11 per cent range seen in recent years.
In the U.S., recent signs point to an economy on a firmer footing. But a recent dismal showing for U.S. housing starts this week showed how serious trouble spots remain that could send the rebound off course.
"It is hard to believe, looking at the housing data and understanding the sector's importance in driving growth for the entire economy … that we can end up having much of a recovery during periods where there is scant government stimulus," David Rosenberg, bearish chief economist and strategist with Gluskin Sheff + Associates Inc., says in his latest note to clients.
"A sharp slowing in global GDP in the second half of the year cannot be ruled out."
The long-troubled Japanese economy accounts for about 6 per cent of global GDP. The economy shrank in the fourth quarter, and analysts now calculate that the crisis will translate into at least two more quarters of contraction, after which massive spending on reconstruction should kick in.
Whether Japan's disaster becomes the straw that breaks the struggling camel's back depends on Tokyo's ability to contain the nuclear crisis. One worst-case analysis pegs potential economic losses from the nuclear fallout at ¥7.4-trillion ($92.1-billion), just under half the conservative estimates of the damage caused by the earthquake and tsunami. Estimated reconstruction costs run anywhere from ¥10-trillion to ¥20-trillion - about 4.2 per cent of the economy.
The financial costs will not be confined to Japan. With their vast surpluses, the Japanese have long been a key source of capital for global markets. Japan was the second-largest foreign buyer of U.S. Treasuries last year, and snapped up more than 20 per cent of the €5-billion in debt issued by the European Financial Stability Fund in January to shore up fiscally crippled peripheral euro zone countries.
"To the extent that savings are now redirected, directly or indirectly (through the purchase of Japanese government bonds), towards reconstruction, these funds will not be available to finance foreign borrowers," says Satyajit Das, a global risk expert based in Sydney, Australia. "This contracts the pool of global capital available," and raises the cost, he said.
Repatriations by Japanese corporations, insurers and other institutions from the U.S. alone will total between ¥2-trillion and ¥3-trillion, estimates economist Ken Courtis, founding partner of Themes Investment Management in Hong Kong and long-time Japan watcher. Japan holds slightly more than ¥72-trillion worth of U.S. government bonds.
Still, some analysts say Japan's problems will eventually pass, and dislocation will remain contained. Repatriations on that order only amount to about 75 per cent of the interest income for Japanese holders of U.S. government debt in 2011.
The "repatriation thesis" sees U.S. interest rates rising as the Japanese dump U.S. assets. But it's possible that the Japanese government and private investors will hold on to foreign investments and their higher returns, and raise most of their needed capital in their own bond market, analysts say.
To determine the extent of the potential global cost from Japan, it's important to examine the likely effects on the various GDP segments - production, consumption, investment, public spending - and separate what are likely to be temporary disruptions from permanent losses, says Arthur Heinmaa, managing partner with Toron Investment Management in Toronto, who has been doing such analyses for clients.
He argues that there will be little lasting effect on any components of world GDP. "Will people buy one less iPad [outside Japan]because of the earthquake?" Mr. Heinmaa asks. "I don't think so."
Most production of Japanese cars, high-tech electronics and other manufactured goods will only be deferred for brief periods. Toyota, for instance, can quickly make up for any lost output through extra shifts.
Normal imports will be disrupted for a time, as efforts turn to bringing in supplies essential to dealing with the disaster and then the reconstruction. That could prove a huge boon to foreign suppliers like Caterpillar, a major U.S. supplier of equipment to run the diesel and natural-gas-powered generators Japan will need to replace lost electricity output from its nuclear plants.
As for the global economy, bullish analysts argue that the growth story in the United States and elsewhere will remain intact, despite the litany of problems and the terrible blow suffered by the Japanese. And even most bears do not see a major spillover from the natural disaster, apart from some temporary supply problems in Asia and a slight dip in the world's gross domestic product.
Any economic disruptions outside Japan are likely to be small and short-lived, thanks to more flexible global supply chains and the ability of other producers, such as South Korea, to step into export gaps.
"Japan is not a net big contributor to world growth. So if it falls for a few months, it's not going to have an enormous effect," says Allan Meltzer, a professor of political economy at Carnegie Mellon University in Pittsburgh and a former adviser to the Bank of Japan.
Japan's economy went off course for about two months after an earthquake in 1995 flattened much of Kobe, one of the world's busiest ports. "This is bigger and much more devastating, but I don't believe it will be much longer-lasting," Prof. Meltzer says.