Japan's Disasters Pose a Slight Risk to the U.S. Economy

Practical Economics

Japan's Disasters Pose a Slight Risk to the U.S. Economy

The devastation will likely hit Japan hard, and slow overal global growth from 4.2% to 4% this year. But the direct impact on the U.S. will be modest.

There is, of course, no way to put a value on the terrible loss of lives and the rending of family and community affecting Japan. The country's three-pronged crisis will also deliver a big blow in purely economic terms, likely triggering a short-term contraction there. But Japan isn’t the giant it once was in the ranks of the global economy, so the destruction of factories and shops in the island nation isn’t likely to send either the U.S. economy or that of the world into recession.

Japan has a skilled workforce and a track record of rebounding from destruction, whether the ashes of World War II when Nagasaki and Hiroshima were destroyed by a nuclear explosion and radiation or the big earthquake that hit the city of Kobe in 1995. The country is deep in debt, but it can dig even deeper to rebuild roads, bridges, ports and factories leveled by last week's earthquake and tsunami. In fact, Japan is likely to see a spending boom by early 2012. Until then, the hit to Japan’s GDP will probably trim about two-tenths of a percentage point from the global growth rate this year, taking it from 4.2% to 4%.

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What about the impact on the U.S. economy? Growth in the current quarter is running at about 3%, following an increase of 2.8% in last year’s fourth quarter. That’s hardly a boom, but it is a steady gain, and the impact on the U.S. economy should be slight. All told, Japan buys about 5% of total U.S. exports. The U.S. buys about 6% of what Japan sells outside its borders. The main goods Japan peddles in the U.S.: Passenger cars, auto parts, computers, semiconductors and telecom equipment.

To be sure, there is a possibility that the disaster in Japan could have much more far-reaching consequences for the U.S. and world economies. If radiation leakage from damaged nuclear reactors expands south to blanket the capital of Tokyo and the industrial area around Osaka, the resulting shutdown of goods and services would put Japan in uncharted waters. For now, however, most of the damage is contained in Japanese provinces that account for about 6% of the nation’s GDP -- the equivalent in the U.S. of losing roughly half of California’s 13% share of the economy. In terms of land mass, Japan is, in fact, about the same size as California, but its population of about 128 million is three and a half times larger than the Golden State’s.


Nevertheless, some companies in the U.S. may well take a short-term hit to production as supplies from Japan shrink. The region hit by the disaster accounts for 7% of Japan’s factory output, and many factories there will have to be rebuilt. In addition, with at least five of the country’s 55 nuclear plants shut down, rolling electricity blackouts have begun in an attempt to conserve energy. It’s not yet clear what, if any, lingering impact there may be on the nation’s power grid and how much the blackouts will hurt output.

Auto manufacturers based in Japan with plants in the U.S. are clearly vulnerable to shortages of supplies shipped here from overseas. But the less Japanese firms sell, the more Ford and GM will gain. The electronics industry would suffer, as the northern region of Japan is a hub of information technology manufacturing. Delta Airlines and United Continental, which serve U.S. to Japan routes, will lose some tourist and business travel, but analysts note that the two airline giants are well diversified.

Concern that Japan’s insurance companies and other institutions there that hold U.S. Treasuries might sell them to raise cash is overstated. Because Japan ranks second only to China among foreign holders of U.S. debt, a major sell-off could have serious consequences for the U.S. dollar and interest rates. But it would also drive up the value of the yen, slamming Japan’s export-heavy economy at a time when the country could hardly afford it. So Japan’s central bank stands ready to buy U.S. Treasuries in order to keep the yen from rising.

There is a potentially much greater economic concern for the U.S. playing out in the political struggles in the Middle East. Most recently, the move by Saudi Arabia to send troops into Bahrain to back up that country’s rulers threatens to draw Iran into the fray, possibly igniting full-fledged war. That would drive oil prices toward $150 a barrel or higher and would likely trigger another recession in the U.S.