News Analysis: Global recovery to stay intact as Japan reels

09:31, March 18, 2011      

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Empty boxes are seen at a morning market in Hakodate city, north Japan's Hokkaido Prefecture, March 17, 2011. The market was ravaged by waves brought by tsunami on March 11. (Xinhua/Ren Zhenglai)

While Japan reels from the double whammy of a major tsunami and an earthquake that set off a nuclear reactor crisis, it is unlikely to derail the global economic recovery.

That is because Japan, unlike some other Asian countries, has not been an engine driving global growth for many years, a factor that is likely to blunt the impact on the United States, Asia and the rest of the world.

"It would probably take two more earthquakes like the one last week and they'd have to be in Tokyo Bay to have that kind of global problem," said James F. Smith, chief economist at Parsec Financial.

To be sure, though, there have been short-term impacts.

U.S. stocks plunged nearly 300 points at the start of trading on Tuesday before bouncing back slightly. At the same time, Japan's Nikkei underwent a two day sell-off that amounted to its worst two-day loss in four decades.

On Wednesday, the Nikkei rebounded nearly 6 points, although the gain fell short of making up for the week's earlier losses. The sell-off came amid investor uncertainty over how the nuclear reactor crisis could play out in Japan.

While economic fallout is unlikely to make any big splash overseas, Chief Global Economist at the Economic Outlook Group Bernard Baumohl argued that the world's third largest economy could shave off worldwide growth by 0.2 of a percentage point this year.


While the global recovery will remain intact, the disasters will take a toll on Japan, lowering economic activity as much as one percentage point, Baumohl said.

Japanese officials and business leaders are also facing a reconstruction tab that could amount to more than 200 billion U.S. dollars, double the rebuilding cost after the 1995 Kobe earthquake, he said.0 The country will also have to finance all the repairs at a time when Japanese sovereign debt is already higher than any other industrialized country and is expected to surge to 228 percent of the GDP in 2011. That will heighten concerns of a default, especially if interest rates start to rise, he contended.

"It is true that Japanese investors hold more than 90 percent of the country's sovereign debt. But if foreign investors begin to sell off their holdings, will Japanese institutional bondholders be far behind?" he asked.


Some experts said there will be some disruptions in Asian supply chains to which Japan belongs.

Barry Bosworth, senior fellow at the Brookings Institution, said that the interruptions may knock a half a percentage point or so off the growth of some countries for a couple of months. Still, it will be temporary and have no major impact, barring any major nuclear catastrophe.

Most of the disruption in supply chains will happen inside Japan, he added.

In the medium term, however, Japan will see a 200 billion dollar plus reconstruction effort. Reconstruction of the areas damaged by the earthquake and tsunami will provide a much-needed jolt to Japan's sluggish economy, some economists said.

Source: Xinhua
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