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High disaster cost for Japan

Japan’s massive earthquake and tsunami could cost its economy up to US 235 billion, or four per cent of output.

Friday 25 March 2011, 05:47AM

An upended house in Ofunato. – Photo US Navy

An upended house in Ofunato. – Photo US Navy

Japan’s massive earthquake and tsunami could cost its economy up to US 235 billion, or four per cent of output, and reconstruction could take five years, the World Bank warned on Monday.

“If history is any guide, real GDP growth will be negatively affected through to mid-2011,” the bank said in its latest East Asia and Pacific Economic Update.

But growth should pick up in subsequent quarters “as reconstruction efforts, which could last five years, accelerate”, it added.

The lower end of the damage estimates, based on projections by the Japanese government and the private sector as of March 17, was equivalent to 2.5 per cent of gross domestic product (GDP), or US 122 billion.

Ratings agency Moody’s, in a special report, said downside risks had increased over the past week for Japan’s economy, sovereign credit, banking, insurance, and non-financial corporate sectors.

World Bank chief regional economist Vikram Nehru said a nuclear crisis arising from a power plant crippled by the disasters has complicated the situation and its impact will depend on how long it takes to solve the problem.

Nehru said the Japanese yen, which shot to post-war highs against the US dollar after the disasters, was expected to normalise after Japan and its fellow G7 rich nations vowed action to stem the currency’s rise.

“We’re not terribly worried about that,” Nehru told reporters in Singapore. “The expectation is that this strengthening of the yen was relatively temporary.”

Japanese financial markets were closed on Monday.

Nehru said the Japan disasters would affect the rest of Asia but it was too early to give estimates of the cost to the region.

Laguna Golf Phuket

“In the immediate future, the biggest impact will be in terms of trade and finance,” he said.

The World Bank noted that after the 1995 Kobe earthquake, Japan’s trade slowed only for a few quarters, with imports recovering fully within a year and exports rebounding to 85 per cent of pre-quake levels in the same period.

“But this time around, disruption to production networks, especially in automotive and electronics industries, could continue to pose problems (beyond one year),” the report added.

The bank noted that developing East Asia’s trade with Japan accounted for about nine per cent of the region’s total external trade in the past five years. It estimated exports from the region could slow by as much as 1.5 per cent if Japan’s GDP shrank by 0.25 to 0.5 per cent.

The auto and electronics industries are already feeling the impact from the country’s deadliest natural disaster since 1923, with production at major companies including Toyota and Sony disrupted.

In the electronics sector, prices of memory chips – Japan supplies up to 36 per cent globally – have shot up by more than 20 per cent in some segments, the World Bank said.

Reconstruction efforts may also affect East Asian countries holding yen-denominated liabilities, according to the report.

“A one-per-cent appreciation in the Japanese yen translates into a US 250 million increase in annual debt servicing on yen-denominated liabilities,” the bank noted.

One-quarter of the region’s developing economies have long-term debt denominated in yen – ranging from eight per cent in China to roughly 60 per cent in Thailand. – AFP



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