Economic analysis

The Japanese economy: what now?

There are a few reasons for (moderate) optimism

As Japan grapples with what Prime Minister Naoto Kan described as the country’s biggest crisis since WWII, analysts are racing to predict what the impact of the earthquake will be. There’s much doom and gloom about how much the reconstruction effort will cost, what footing the bill will do to Japan’s public debt, how long it will take for production in key industries such as electronics and the auto sector to go back to full gear, and the threat of inflation a result of the vast destruction of Japan’s farmland which will mean a hike in food prices.

However, there are reasons for moderate optimism. The massive rebuilding that will follow the quake is bound to act as a powerful stimulus on the economy, and that could cushion a near-term GDP slowdown. The earthquake will also probably generate a rally-‘round-the-flag sentiment, and shake off the political stalemate that has paralyzed Japanese politics in recent years.

Also, the earthquake didn’t hit Japan in the worst possible spot. The epicenter was closest to the Miyagi district, which accounts for 1.7 per cent of Japan’s GDP. By contrast, the 6.9-magnitude quake that roiled Japan in 1995 hit an industrialized urban area that accounted for as much as 4 per cent of the country’s economy, according to Roubini Global Economics, an economic and market strategy research firm.

Even when looking at the financial markets, where Tokyo stocks suffered their biggest fall in two years on Monday, there’s a way to see the glass as half-full. The earthquake is a huge blow for insurers, but it is not expected to translate into capital flights and runs on the yen, according to Roubini.

On the other hand, the impact of the quake has been unexpectedly heavy for the luxury industry. Investors focused their concerns on Tiffany and Coach, which have a massive retail presence in Japan and whose stock tanked in the S&P 500 today. Even this pessimism, though, might be unwarranted, according to analyst Brian Sozzi from Wall Street Strategies, a stock market research company. The companies’ exposure to the Japanese earthquake, he wrote in an email to clients, will depend more on whether their stores are clustered near disaster areas than their sales volumes in Japan.

If you’re wondering what the earthquake will do to the nuclear industry, don’t miss Jason Kirby’s in-depth analysis coming out in our print edition of Maclean’s on Thursday, March 17.