Japan Adds to Global Economy Woes

The Wall Street Journal, March 15, 2011

Deepening economic damage in tsunami-wracked Japan is threatening to derail the world's third-largest economy, adding yet another source of instability to a global economy that's already grappling with troubles in the Middle East and higher prices for oil and food.

Bad news proliferated in Japan and across Asia on Tuesday, as officials struggled to contain damage at the troubled Fukushima Daiichi nuclear power plant that has suffered problems in four of its six reactors since Friday's massive earthquake and tsunami. Although officials appeared to have regained some control by late in the day, panic had already spread to regional markets, leaving many economists and companies less certain Japan would recover from the disaster as quickly as they had hoped.

Japanese auto makers and other factories extended closures for several more days at least, potentially imperiling deliveries of everything from Prius hybrid cars to the flash chips that go into iPhones and iPads. Taiwan's EVA Airways said it will cancel 56 flights between Japan and Taiwan, including some through the end of June—and saw its share price nosedive 6.9%.

Tens of thousands of tourists have canceled trips to and from Japan, while regional rubber-industry leaders called a special meeting likely to be held later this week to try to arrest a sharp drop in rubber prices amid expectations of weaker demand in Japan.

Markets fell across Asia, led by an 11% drop of Tokyo shares following a 6.2% fall Monday, the worst performance of the Nikkei since its Oct. 16, 2008, drop of 11.4% during the global financial crisis. Some $364 billion of investor wealth, or 9.4% of the Tokyo Stock Exchange's market capitalization, was wiped out, with begin declines in shares of Tokyo Electric PowerCo., or Tepco, which dropped 25%, and Toshiba Corp., which fell 20%.

Hong Kong's Hang Seng Index tumbled 2.9%, and stocks also fell in China, Australia, Taiwan and South Korea, among others.

Economists stressed that if Japanese officials are able to bring its nuclear problems under control, it should help the country move more quickly into full recovery mode, lifting some of the worries. Growth overall is still expected to be strong in Asia this year, though a number of analysts have said in recent days they may have to ratchet down their forecasts as headwinds multiply.

Either way, analysts were already growing more worried about the global economy, which has moved forward in recent months mainly on momentum from Asia's booming economies, many of which are deeply reliant on Japanese trade and investment. Rising prices for food and oil and rising tensions in the Middle East have driven much of the worry.

Tuesday's problems at Japan's nuclear facilities have only added to the uncertainty. The normal pattern for countries that suffer disasters is for their economies to undergo temporary slowdowns, as production seizes up, followed by a rebound a few months later once reconstruction spending takes hold. Economists in recent days had been saying they expected Japan to post weaker growth and possibly a contraction in the next one to two quarters but then recover quickly at the end of the year, but now that may be changing.

"What [people] are worried about is the potential from the nuclear power plant, and that can have very different implications," said Changyong Rhee, the chief economist at the Asian Development Bank in Manila, though he said he still thought Asian companies had enough flexibility to adjust to most issues japan could face.

Part of the problem is that the full scale of the damage—and most importantly, how long auto plants and other key production centers will be offline —is still unknown.

Even though serious damage was limited to a few areas, Japan's problems are nationwide because supplier logistics have been severely dislocated by restrictions on using highways for freight, as well as unpredictable power cuts that make operations planning extremely difficult. Meanwhile, the shadow of the ongoing nuclear crisis is making many companies reluctant to ask staff to report for work until the situation clears.

Underscoring the nationwide reach of the problem, Mazda Motor Corp. on Tuesday said it's suspending all domestic plant operations until March 20, even though it's based in Hiroshima, with most of its plant in the west of the country.

Honda Motor Co. has also closed plants in Japan until Sunday while Nissan Motor Co. has four plants shut until Wednesday and another two until Friday. Toyota Motor Co., the world's biggest auto maker by sales, has so far only confirmed closures from Monday of this week through Wednesday, putting the level of vehicle production lost at 40,000. But if it falls in line with peers, and suspends production for the rest of the week, it could lose roughly 60,000 vehicles out of regular monthly production of about 250,000 vehicles.

One of the biggest headaches for plant managers—the rolling power cuts —may last through the end of April, according to utility company Tepco.

Some economists and companies continued to see silver linings in the disaster, however tragic it was. Executives at India's Essar Steel Ltd. and state-run Steel Authority of India Ltd. said Tuesday they expect exports of finished steel to Japan to climb in the coming months as the country rebuilds and owners of wooden buildings along Japan's coastline replace them with sturdier structures. Thailand's Thai Union Frozen Products PCL, the world's biggest canned-tuna producer by sales, said Tuesday it expects increased sales to Japan as the country looks for alternative food sources following damage to areas with seafood processing.

In an interview with Dow Jones Newswires, Bank of Thailand Gov. Prasarn Trairatvorakul said he didn't think Thailand would suffer any significant impact from Japan's disaster and might even benefit long-term, as Japanese companies push to further diversify their manufacturing bases overseas.

But many other companies are experiencing serious pain. Consider Eita Electric, a Malaysian company that supplies circuit breakers and other products for high-rise buildings, with many of the components manufactured at two factories in Japan. Two consignments valued at $200,000 are held up indefinitely because of transportation holdups and problems at Japan's Yokohama port, said Y . T. Chong, the company's managing director. Future orders will also likely be affected, he said, because production at the factories has stopped due to power shortages.

"My business will be badly affected," he said. "I cannot source this from any other country because these items are sold under a well-known Japanese brand, and therefore it has to come from Japan. There is nothing much we can do."

Tetsuya Wakuda, a Japanese-Australian celebrity chef with restaurants in Sydney and Singapore, including one at Singapore's glitzy Marina Bay Sands entertainment complex, said the disaster has disrupted many of his suppliers and that some high-grade seafood typically sourced from Japan will likely need to be acquired from Australia and New Zealand.

"It's devastating for all our suppliers because a lot of Japanese seafood comes from the eastern coast, which is all destroyed," Mr Wakuda said. "This is not going to come back for weeks, months or even a year," with waters off the Sanriku coast, which is famous for its abalone and sea urchin, unfit for fishing at present.

The Japanese disaster is bound to make corporate executives world-wide rethink their contingency planning and their vulnerability to shocks from overseas. That has a certain poignancy given that Japanese car makers pioneered the concept of "just-in-time" manufacturing, in which plants stock a minimum of inventory and rely on global transportation and communications to deliver what is necessary on a tight schedule. Now those car makers, and others that copied the Japanese methods, must cope with lost production from the Japanese plants.

In China, auto plants typically have a week of imported Japanese parts on hand and another two to three weeks worth of parts on ships heading toward Chinese ports. If Japan can gets its auto factories back into production quickly, any disruption should be minimal, especially since the Japanese car makers may be able to make up lost production by running more shifts.

But a longer shutdown is bound to have deeper consequences. In the auto industry, Japanese manufacturers rely on their home factories to produce hybrid cars and batteries, electronic control systems and high-end automobile entertainment systems, says Bill Russo, president of Synergistics Ltd., a Beijing auto consulting firm. Some of those components are sold to auto competitors too.

Contingency plans rarely provide back-up for every part a company makes or needs, he said. Instead, the company figures out how to make do with lost production—for instance, building cars without the fanciest entertainment systems included, or building fewer hybrids than planned.

In China, the International Business Daily, the Commerce Ministry's paper, reported that Chinese firms would have to delay the launch of new products because they may not be able to import needed electronic components from Japan.

The disaster is also likely to give a further push to China's already aggressive plans to increase the sopistication of the products it can make domestically, so it's less reliant on foreign firms.

Liu Xiaojun, a manager with Shanghai Lunsure Technology, an electronics assembly company, said his firm buys components solely from Chinese firms because they are less expensive than imports and because Chinese quality is improving. He noted that the Chinese government has been urging electronics firms to produce higher-end parts, including silicon chips, domestically.

—Samuel Holmes, Celine Fernandez, Yoli Zhang, Hui Leng Tan, Piyarat Setthasiriphaiboon, Kenneth Maxwell, Leigh Murray and Phisanu Phromchanya contributed to this article.
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