The economic impact of disaster in Japan

If investors panic, their hysteria alone can intensify any perceived emergency. Conversely, steel nerves can mitigate even real impending disasters.

Japan tsunami 521 (photo credit: Reuters)
Japan tsunami 521
(photo credit: Reuters)
Japan is a chain of islands straddling one of this planet’s most seismically sensitive hotspots. The devastation its geological misfortune has triggered, however, serves to prove yet again – if any further corroboration were needed – that in our globalized existence, no economy is an island.
Economic powerhouse Japan manufactures some key products. Hence, there is no way its travails can fail to trigger chain-reactions around the world, even in places ostensibly far from its massive quakes and consequent nuclear crises.
It’s much too early to draw definitive economic conclusions from the cataclysm that has struck Japan. Nonetheless, it can be construed that any fall in exports will be a blow to an economy that wasn’t in brilliant shape already before nature’s thrashing. The Japanese economy, in fact, had been contracting of late rather than expanding. New damages are sure to further slow down its recovery.
Most of Japan’s industrial complexes weren’t destroyed. That said, the yet-evolving menace of radioactive contamination presents what is currently an inestimable quotient. That suffices to introduce instability to world financial markets. Everything is in flux now, and angst seems to hover ominously above all bourses. Sell-offs are natural in periods of uncertainty because risk rises, and rising risk ushers in risk aversion.
What is clear is that one of the more important economies has taken a beating whose ramifications cannot yet be fully evaluated. It is equally clear that this will impact economies elsewhere. Globalization has interlinked most economies, and probably none can remain unscathed when a significant economy is in trouble.
ON THE primary level, any country, including Israel, that exports to Japan is likely to feel some pain. On a broader level are the complications of multinational investments. Outsiders are heavily invested in Japan, and Japan is heavily invested in foreign countries as well. The aftershocks of Japan’s upheaval will reverberate globally.
Israel is no exception. We are certainly not at the forefront of economies liable to be most immediately affected, though our bigger trading partners are at that forefront, making us potential victims of secondary impact. Our trade with Japan is asymmetrical. We import almost $2 billion worth annually, and only export, without diamonds, some $600 million. Direct Israeli investment in Japanese firms is negligible.
In the short-run, the hardest-hit in Israel will probably be car importers, insurance concerns and technology companies with ties to Japan. In the long-run, though, Japanese reconstruction can create stimulus.
What is most imperative to keep in mind is that shakiness in the globalized marketplace and especially in financial markets is here to stay for a while. The Japanese calamity came very hot on the heels of the still-spiraling unrest in the Arab world –the largest supplier of fossil fuels. Oil is now likely to become even more vital, given the setback to nuclear energy following Japan’s tribulations.
Coupled together, these twin turbulences are the opposite of what was prescribed to pull the world decisively out of the recession that recently gripped it. Volatility may trouble us for extended durations and unsteady markets tend to underscore the insecurities of small-time savers rather than professional players.
If the ma and pa investors get anxious about life-savings or pension plans, they are most prone to unload their relatively modest holdings, as was the case in the aftermath of the September 2008 credit crunch debacle.
Innumerable householders either lost their nest eggs or saw them drastically reduced in value because they pulled out when the market was at its ebb, thereby realizing tremendous losses.
THERE IS no reason to repeat such mistakes again, no matter which turn the wobbly markets may eventually take. We have no way of knowing just now. Our own economic leadership must remain vigilant and calm the storm should it arise. Still, the role of individuals is paramount here, primarily because market fluctuations can be driven by subjective factors almost as much as by objective predicaments.
If investors panic, their hysteria alone can intensify any perceived emergency. Conversely, steel nerves can mitigate even real impending disasters.