Economic losses in northeast Japan: $183B

MANILA, Philippines—As the humanitarian and nuclear crises in Japan escalated after the devastating earthquake and tsunami, the impact on the country’s economy appeared to be spreading as well.

Economists say it is still too early to assess the full cost of the destruction from the record 8.9-magnitude quake and the 10-meter wall of water that laid waste to the northeastern coast and triggered a nuclear emergency.

But leading risk analysis firm AIR Worldwide estimated insured losses from the earthquake alone could reach nearly $35 billion.

Hiromichi Shirakawa, chief economist for Japan at Credit Suisse, said in a note to clients that the economic loss would likely reach $183 billion (15 trillion yen)—just to the devastated northeast region.

“The quake is expected to have considerable impact on a wide range of our country’s economic activities,” Chief Cabinet Secretary Yukio Edano said.

Energy squeeze

While Japan’s industrial clusters in the south and west seemed to be spared the worst, the crisis at damaged nuclear plants north of Tokyo was threatening to cause an energy squeeze that could set back all sectors of the economy.

The nuclear industry provides around a third of the Japan’s power needs.

To help bring electricity back to the devastated areas, utilities across Japan are cutting back and sharing power, imposing rolling blackouts that will affect factories, stores and homes throughout the nation. The emergency effort is expected to last up to two weeks, but it could take longer.

“The big question is whether this will seriously affect Japan’s ability to produce goods for any extended period of time,” said Edward Yardeni, an independent economist and investment strategist.

Bleak outlook

The bleak outlook sparked a 6.2-percent plunge in the Nikkei 225 stock index in Tokyo on Monday, as companies from Sony to Fujitsu to Toyota scaled back operations.

The Bank of Japan, in an effort to preempt a further deterioration in the economy, eased monetary policy on Monday by expanding an asset-buying program.

“The damage of the earthquake has been geographically widespread and thus, for the time being, production is likely to decline and there is also concern that the sentiment of firms and households might deteriorate,” the central bank said in a statement.

The central bank earlier injected a record $183 billion (15 trillion yen) into money markets to defend the already fragile economy. By flooding the banking system with cash, the central bank hopes that banks will continue lending money and meet the likely surge in demand for funds.

Car firms shut down

Assembly plants for Japan’s big three automakers—Toyota, Honda and Nissan—were closed on Sunday and planned to remain closed on Monday. Toyota said its factories would be closed at least through Wednesday.

Automakers said some plants experienced damage that was not extensive. Damage to suppliers and to the nation’s transport system and infrastructure, however, was expected to affect the ability of the car assemblers to make and move their products.

Japan’s economic outlook, already problematic, is now even more uncertain, economists and analysts say, because the dimensions of the disaster remain unclear, especially at the damaged nuclear plants.

Another bout of recession

Japan, already saddled with debts twice the size of its $5-trillion economy, may suffer “another bout of recession,” said Mark Zandi, chief economist of Moody’s Analytics.

Economic activity in Japan contracted in the fourth quarter of 2010, and the country was overtaken by China as the world’s second-largest economy, after the United States.

Activity may well shrink for the first half of this year, Zandi said, though he predicted that the rebuilding efforts in the aftermath of the quake would help provide a rebound in the second half.

Rebuilding costs that could run in the tens of billions of dollars may require Japan to make tough decisions about government spending. Its ratio of government debt to the economy’s annual output is already at 200 percent, the highest among industrialized nations and far higher than in the United States.

So reconstruction, economists say, may make cuts in government spending elsewhere a necessity.

Stronger yen

The yen is expected to strengthen against the dollar, as Japanese investors bring money back from overseas to shore up their savings and provide money for the rebuilding campaign. Those financial flows back into Japan will drive up demand for the yen, increasing its value.

After the Kobe earthquake in 1995, the yen rose about 20 percent against the dollar over a few months, dampening US demand for Japanese exports.

If energy curbs and infrastructure damage hinder production in a significant way, it could also harm Japanese companies and affect consumers abroad.

Japanese automakers have shifted much of their manufacturing overseas in recent years. But some popular models are still made in Japan for export, including fuel-efficient cars like the Toyota Prius and the Honda Fit.

Disruptions in exports could hurt sales at a time when rising gasoline prices have increased demand for those cars in the United States.

Hi-tech goods

Japan is also a crucial global supplier of electronic goods and parts used in an array of industrial and consumer goods. The country produces an estimated 40 percent of the lightweight chips used to store data in smartphones and tablet computers, and it is also a leading maker of liquid crystal displays used in consumer electronics products.

Most high-tech goods these days are produced through carefully orchestrated procurement and manufacturing networks that combine parts from around the globe, often shipped on tight daily production schedules. Even temporary shortages can drive up prices sharply for a while.

The daily spot market for certain kinds of semiconductor chips will most likely feel the impact soonest. “There will be a lot of nervousness,” said Jim Handy, an analyst at Objective Analysis, a semiconductor research firm. “This may cause phenomenal shortages in the spot market.”

Productivity losses

Companies with chips that have gone only part way through the manufacturing process would most likely have to backtrack a step and rework those chips when the power returns. Doing so could add a day or two to the time required to finish a batch of chips.

“You’re going to have productivity losses,” Handy said.

Klaus Rinnen, managing vice president at Gartner, a technology research company, said a colleague in Japan, near Tokyo, told him that he was scheduled for rolling blackouts twice a day.

However, shutting off power to chip manufacturers twice a day would be impossible to manage, he said, because fluctuations in power create defects and high losses.

Water supplies

Water is also an important component of the chip-making process, Handy said, and any cut in water supplies or an increase in contaminated water would hurt production.

In the end, only large important customers may end up getting their chip orders, Handy said. Even those will most likely receive less than their contracts stipulate.

Sony’s six factories in the region affected by the earthquake were all damaged, and the company said it had no clear idea when they would reopen. All the facilities have halted operations.

The destruction was most severe at a plant in Miyagi prefecture that makes Blu-ray discs and magnetic tapes.

The tsunami flooded the first floor and the surrounding area, forcing nearly 1,150 workers and 110 neighbors to seek safety upstairs. On Saturday, Sony chartered a helicopter to deliver supplies to those trapped.

By Sunday afternoon, all but 20 had left the plant to check on their families and homes.

Freescale Semiconductor’s plant in Sendai, which makes chips for the automotive and consumer electronics industries, was also shut down. All employees were safely evacuated, the company said.

The overall effect on the technology market, Handy said, would be serious.

“It looks like it’s going to be pretty awful—the electricity, the water, the railroads—there could be plants that shut down,” he said. “All those things are going to cause problems. Just pile all that together and it’s all bad.” Reports from New York Times News Service, Agence France-Presse and Reuters