Japanese Earthquake Effects On The World Economy Economics Essay

11th of March will not be remembered anymore as the date when Volcano Etna in Italy erupted in 1669, killing 15,000 people (History Orb.com,2011), but as the 11th of March 2011, when earthquake of an 8.9 magnitude struck the north-east of Japan at 2:56, local time as BBC journalist reported(BBC News, 2011). The earthquake, which is said to be the most powerful ever in Japan, was more a signal of what was coming next: an unexpected tsunami. The quake occurred at the time when the world’s third largest economy (after China and US) was doing good in recovery .

Obviously the damage was enormous especially for Japan. Firstly, it is an island. Secondly, it is considered one of the world’s leading technological countries. A significant number of dead, missing, homeless and evacuated people, the risk of the nuclear plant explosion, collapsed buildings, the closure of plants and many other damages have had their own effects not only on Japan, but also on the world. These effects are more visible in the economy. The reason is simple: today’s world is becoming more and more familiar with Globalization, the process by which regional economies have become integrated to a global economy. The aim of this essay is to discuss the major economic effects of the earthquake and tsunami to Japan and to the world’s economy.

Effects on Japan economy

Considering that this essay discusses the major effects of earthquake and tsunami on world’s economy, it would be unreasonable and illogical not analyzing the effects on Japan’s economy. Unfortunately the earthquake hit the home of auto manufacturing and semiconductor factories, destroying not only the factories but also the raw materials leading to a suspension of the working process in many autos manufactures such as Toyota, Mitsubishi and Nissan. A large responsibility for the reconstruction cost will be on the shoulders of local authorities and government, which lately has been struggling to recover its public debt figures. Ironically the earthquake and tsunami could increase debt load figure up to 10% of GDP (Brandimarte. W, 2011).

Besides the public debt concern, Japan has to face its currency (Yen) problem. It is often claimed that a strong currency is an indicator of a good economy. Actually the truth is that a strong currency has a bad impact in exports and it damages the ability of the exporter to compete in world market. Owing to the natural disaster, Yen started rising again because there was more possibility that company would send their funds back home. In order to control Japanese Yen, Bank of Japan is using the Quantitative Easing policy (QE), by which the bank creates new money (Pym. H, 2011). Likely this new money will not only calm the destabilizing market and the banking system but it will also stimulate the economy. However, a coin has two sides and controlling the Japanese Yen is just one side of the coin (QE policy). The other side of the coin is a threatening inflation, caused by an increase in money supply and a decrease in its value.

A growing Economy

Apart from the devastating damage, stressing the world’s third largest economy, it is believed that the earthquake and tsunami could have a positive impact in Japan’s struggling economy. The economic problems concerning Japan before the tsunami, which were mentioned in some previous points in this essay, such as a high budget deficit, a large public debt, the increasing contraction of economic activities just in Tokyo area, its trouble banking system. However, Marcus Noland, an Asia expert for The Peterson Institute for International Economics, sees the natural disaster as a kind of stimulus for Japan economy (Mcclatchydc.com 2011). Definitely, the awake of Japan concerning the economy is connected with the long-run as it is impossible to boost an economy in the short-run, especially after being hit by a mammoth wall of water.

Taking into account Japanese high savings rate together with the amount of cash it owns, the private sector of the economy should not face any problem. Moreover Private insurance will cover much of damage to personal and commercial property, said Dan Ryan, a U.S.-based global analyst and Japan expert for IHS Global Insight (Mcclatchydc.com 2011). Another point in favour of is that the economy will not be focused just in Tokyo, but it will start developing even in north. It is more than known that the events in Japan are heartbreaking. Nonetheless, like all natural disasters the negative short term economic impact should hopefully be less than feared and will give way later this year to rebuilding which will help boost growth.

World Economy

Certainly trading is one of the major effects of earthquake and tsunami in world’s economy. Considering the disruptions in Japanese manufacturing activities, the impact on international supply chains could also be considerable. This is particularly important in industries such as autos, telecommunications, and consumer electronics. However, the effects are unequally spread and it is pointed out that they may also be limited. Whilst a declining in Japan supply to U.S would lead to a production stoppage for many autos, non Japan Asia including Australia and Indonesia will benefit from the nuclear problem in Japan by exporting the energy. Hence their economies will see a boost. Furthermore Europe will not be affected (perhaps only minor effects) as countries such as Germany are in itself industrial countries, which exports their product worldwide. As Nariman Behravesh, Chief Economist of IHS, reports: the direct trade impact is not that large, as Japan provides less than 3% of German imports and Japan buys just over 1% of total German exports (Behravesh. N, 2011). However, Europe economy is not doing well due to a fragile economic climate because of the recession of 2008.

Nevertheless, not everyone may agree with the statement that the effects are limited. In addition, disruptions in Japan are increasing prices and causing shortages of significant raw materials and parts, in particular for autos, electronic and shipbuilding. Therefore there is a slow rate production in Japan’s fast-growing neighbours, which are also in `agony` because of a short-run fall off in demand from a major export partner, Japan.