It's obviously a humanitarian disaster, with thousands dead, many more homeless, whole cities demolished, and Japan reeling after sustaining its worst earthquake ever. It's also a major economic disruption that comes amidst instability in the Middle East, spiking oil prices, fears of global inflation, prolonged damage from the 2008 financial crisis, and deepening worries over whether a fledgling global recovery will continue or stall.
Japan's economy will clearly suffer, since the earthquake and subsequent tsunami in northern Japan hit a region that's home to a variety of factories and important ports. And the ongoing battle to prevent catastrophic damage at three nuclear facilities is a high-stakes international cliffhanger. But barring any further disasters, Japan seems poised to withstand the damage, rebuild, and recover. Though it's still early and much could change, here's some handicapping on the likely impact of the earthquake worldwide:
The global economy. "As long as this remains a conventional natural disaster that has disrupted economic activity in a regional part of Japan, the global implications are quite mild," says Marcus Noland, deputy director of the Peterson Institute for International Economics. Most forecasts call for the quake to slice two- to three-tenths of a percentage point off Japan's economic growth in 2011. That might be enough to tilt Japan's struggling economy back into a short recession, but it should be a mild hit. Plus, aggressive rebuilding later this year and an inflow of aid money to Japan could offset a short-term contraction. Though Japan is a wealthy industrialized nation, its economy has been stalled for years, and the global economy has adjusted, especially with China and other Asian nations growing rapidly. So the setback to Japan probably won't waylay the broader global recovery.
The wild card, as Noland points out, are those damaged nuclear reactors. The first obvious concern is a humanitarian and environmental catastrophe. But there are also risks to Japan's entire electrical grid. Japan can manage a minor, temporary reduction in its power supply, and for now it looks like the situation will get better, not worse. But if something were to impair Japan's overall electrical grid, it could derail Japan's industrial economy, and that would impact the economy elsewhere.
Nuclear power. With little oil or home-grown energy of its own, Japan gets about 30 percent of its power from nuclear plants, with plans to raise that to 50 percent by 2030. That strategy will clearly face rigorous reevaluation. And nuclear power is likely to come under more scrutiny in other countries, such as France and the United States, where it's considered a viable large-scale alternative to fossil fuels. A setback for nuclear energy, however, could boost other fossil-fuel alternatives, like geothermal and wind.
The Japanese stock market. Japan's Nikkei stock index fell by about 6 percent on the first full trading day following the quake, which is obviously a steep decline. But it's less than the 7.5 percent decline following the 1995 Kobe earthquake, which is somewhat encouraging. "Compared to Kobe, this is milder," says Noland. Japan is also in a better position with some of its main trading partners than it was in 1995. Back then, Japan was in a kind of trade war with the United States, for instance, with a big row over Japan's efforts to keep the yen weak, to aid exports. The two nations are more cooperative today, which could help Japan recover more quickly.
U.S. debt. Japan is the second-largest foreign holder of debt issued by the U.S. government, after China, with about $882 billion of U.S. securities. Japan could cash in some of that, to repatriate funds it needs to pay for a massive cleanup and rebuilding effort. If it liquidates enough U.S. debt, it could force Washington to pay more to borrow in the future. Japan's holdings amount to well under 10 percent of all U.S. debt, so a crisis is unlikely. Still, America's huge debt load is a touchy, growing problem, with no serious proposals yet to resolve it. Higher borrowing costs would only raise the stakes.
Automobiles. The area decimated by the quake contains several Toyota and Nissan plants that are out of operation, plus many plants belonging to suppliers that service the Japanese auto industry. And most auto plants elsewhere in Japan have been temporarily closed as a precaution, or as a result of power shortages. Forecasting firm IHS Global Insight says that so far, the disaster seems likely to curtail foreign shipments of models such as the Toyota (NYSE:TM) Yaris; Scion xD and xB; Honda (NYSE:HMC) CR-V, Accord, and Fit; and Acura TSX and RL; plus many other models sold in Japan. U.S. dealer networks typically have at least a 30-day supply of most cars on hand, so American buyers may not notice a shortage right away. But automakers have streamlined their inventories on account of the tough economy, and a recent jump in sales could leave dealers short of a few models. If that happens, scarcity could lead to price hikes or dealers less willing to haggle.
The bigger problem for Japanese automakers could be a variety of parts factories that were destroyed. A typical car has about 25,000 parts, and finding replacements when suppliers go offline can be difficult and time-consuming. There's excess auto capacity in other parts of Japan, which theoretically could be used to offset lost plants in the north. But ramping up to replace certain one-of-a-kind parts could take a long time. That's not necessarily a hardship for U.S. consumers, unless they have their heart set on a single Japanese model that suddenly becomes unavailable. But it could mean a market-share loss for the Japanese automakers in many world markets. There's also the chance that a few U.S.-made models, like the Mazda6, could suffer from a shortage of parts shipped from Japan.
Commodity prices. Japan is a significant importer of food, oil, other forms of energy, and a variety of metals and other materials used in manufacturing. Prices have been rising for many of those commodities, causing worries about global inflation. Moody's Analytics says that a slowdown in Japan's economy might temporarily reduce demand for some of those commodities, causing prices to fall. That would be a brief, if unexpected, break for many companies whose costs have been rising, and even some consumers.
Insurers. Most of the exposure for damage claims resulting from the quake rest with Japanese insurers, plus a few in Europe. And the Japanese government could end up with liability for damages from nuclear accidents, easing the burden on the private sector. So far, the damage, while vast, seems no more severe than that caused by the '95 Kobe quake, which was less powerful but struck close to the heart a key industrial region. That disaster caused about $100 billion in economic damage — equal to about 2 percent of Japan's economy at the time — with insurers responsible for about $3 billion in claims, according to Roubini Global Economics. If the scale of the latest disaster escalates no further, insurers should be able to handle it. With luck, Japan will too.
Disclosure: No position