What will be the impact of the earthquake, tsunami and potential Chernobyl style nuclear meltdown on the Japanese economy? It looks grim.
Japan is already the world's most indebted economy, its public debt valued at close to 200% of GDP. Japanese government debt already stands at a mind-boggling one quadrillion yen (one thousand trillion yen or $US12.2 trillion). Japan is also the world's third biggest economy after the United States and China so anything that happens there will have an impact everywhere else.
The Japanese government plans to bring in a package which will increase that debt.
This will delay any recovery in Japan. The Wall Street Journal tells us that until the earthquake, economists were saying the Japanese economy would recover in the second quarter this year. Now they're saying it won't be until the fourth quarter, and that's the earliest. Indeed some economists are warning that the Japanese economy, hit by a triple whammy of earthquake, tsunami and nuclear meltdown, will slip back into recession. Japan's auto makers have all but suspended domestic manufacturing. Sony has shut six electronic-component factories. Kirin, Asahi and Sapporo breweries accounting for about 40% Japan's beer production are out of action.
Now on one reading, Japan might be able to ride this through. Japan, after all, is still a rich country and unlike the US, it relies mainly on domestic savers to lend it money, and lately they've been doing that at exceedingly low interest rates. But commentators now warn they can't continue to do this with Japan's rapidly ageing population leaving the workforce. Because it won't be able to go to its own people, Japan will have to pay sharply higher interest rates by borrowing offshore. The alternative is for the Japanese central bank to print money and buy Japanese government bonds.
Either way, it means that Japanese households will have to help foot the repair bill.
This will have an impact on the US economy. If Japanese insurers and pension funds are forced to sell US bonds, it will hurt the US market. Japan is the second largest foreign investor in US government bonds, holding $US882 billion at the end of 2010, compared with China's $US1.16 trillion. Japan selling out will make it harder for the US government to borrow.
Whichever way you look at it, the fallout from the earthquake will be felt around the world.
no comment untill now