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Japanese production disruptions threaten global supply chains

City lights and billboards are turned off at Tokyo's Ginza fashion district on Monday

JIJI PRESS/Jiji Press/AFP Getty Images

As the death toll, property losses and nuclear crisis escalate in Japan, the impact of what is expected to be the costliest natural disaster in modern history is quickly rippling through the global economy.

Global supply chains are under threat as Japanese auto makers, electronics manufacturers and steel producers shutter plants following the devastating earthquake and tsunami. Many Japanese factories, retailers and offices are bracing for power outages as a series of rolling blackouts are set to hit Tokyo and the surrounding area in coming weeks.

The effects of the production disruptions are expected to spread across Asia and around the globe, along with an immediate slowdown expected for the $5-trillion (U.S.) Japanese economy, the world's third largest. In a heavily interconnected global trade and manufacturing system, a reduction or halt in the production of electronics or automotive components in Japan would constrain manufacturing in China and other Asian assembly hubs.

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Japan, already burdened with heavy debts and slack domestic demand, faces long-term harm to its economy and fiscal position, analysts said.

The financial cost of the quake and the tsunami is expected to be "at least" $180-billion, according to Credit Suisse and Barclays. That is more than 50 per cent higher than the total cost of the Kobe earthquake in 1995, believed to be the costliest natural disaster since 1900. Insurance companies will foot much of the bill. Damage claims that will be filed to global property and casualty insurance companies are estimated to reach as high as $35-billion.

In an attempt to prevent further damage to the economy, the Bank of Japan dramatically loosened monetary policy Monday, offering to inject a record ¥15-trillion ($183-billion U.S.) into the banking system. Nonetheless, Tokyo stocks nosedived more than 6 per cent and have declined more than 8 per cent since the disaster struck on Friday.

The earthquake "has inflicted damage in a wide area. Output is likely to fall for some time. We are also worried that corporate and household sentiment will worsen," the BoJ said in a statement.

Ports handling as much as 7 per cent of Japan's industrial output were damaged by the quake and tsunami and many were expected to be out of operation for months.

As attempts to prevent a meltdown at several damaged reactors in Japan became more desperate, shares of companies tied to the nuclear industry - including General Electric Co., Toshiba Corp. and Canadian uranium producing giant Cameco Corp. - were pummelled Monday as concerns about the safety of nuclear power heightened.

China, which has been the key driver of the so-called "nuclear renaissance," could slow down or delay its ambitious plans to build scores of new reactors, Na Liu, the founder of CNC Asset Management Ltd., said in a note to clients.

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The effect of the disaster on other commodity producers is less certain. A drop in output by Japanese steel makers could reduce demand for coking coal mined by Teck Resources Ltd. In 2010, the Vancouver company shipped 63 per cent of its coal production to Asia.

"We have been contacting our customers and partners there and trying to sort things out. We don't have full information back from them yet. So we just don't know," said Marcia Smith, Teck's vice-president of corporate affairs. Ms. Smith would not specify how much of the company's production goes to Japan.

Japan's largest company, auto maker Toyota Motor Corp., halted production at all 12 of its plants in Japan until at least Wednesday. Rivals Honda Motor Co. Ltd. and Nissan Motor Co. Ltd. shut their factories on Sunday and Monday.

While Japan's top auto makers all shifted much of their production offshore in the last decade, some foreign manufacturers were already feeling the impact. France's PSA Peugeot Citroën stopped production of its iOn and C-Zero electric cars, which are based on Mitsubishi Motors Corp.'s iMiEV and manufactured in Japan, Reuters reported.

The consumer electronics sector may be the most vulnerable to global supply-chain disruptions. Analysts estimate that a fifth of all global technology products are made in Japan. Electronics firms including Sony Corp., Toshiba Corp. and Fujitsu Ltd. have all reduced production, constraining supplies for everything from memory chips used in smart phones and computers to glass for flat panel displays.

Offshore electronics firms including Taiwan's Foxconn Technology Group, which assembles Apple Inc.'s iPads and iPods in mainland China, and South Korea's Hynix Semiconductor are facing possible component supply disruptions.

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"We are more concerned about the quake reducing overall consumer demand and disrupting supplies of chip components and equipment, which could interrupt our production as well," Hynix's chief financial officer Kim Min-chul told Reuters.

Insurance companies are adding up the damage. Toronto's Manulife Financial Corp. said it expects claims not to exceed $150-million (Canadian). That would not have a material impact on the company's annual profit, the insurer said.

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