Japan's earthquake and tsunami disaster has led to radiation spewing out from the damaged nuclear reactors after explosions. The economic impact of the post-disaster has led to Tokyo's share market dropped by 16 percent in the past two days. Since investors have massively withdrawn from the Japanese stocks, the trading volume by investors to withdraw their shares from the Japanese stock market in the past two days was the highest since the Second World War.
While, the Asian share market could not avoid being dragged by the Japanese share market, the share market in the United States and European countries also could not avoid being affected. All of a sudden, the global share market turns color and becomes weak. The economic response to Japan's natural disaster is gradually fermenting.
Financial and Property Damage
According to expert prediction, the financial and property damage caused by this round of earthquake and tsunami in Japan can easily be at least above $150 billion. Moreover, new financial damaging figure has continued to pour in. Some estimated that the financial damage caused by the earthquake and tsunami is about three percent of Japan's Gross Domestic Product (GDP) in 2010. Besides, the Japanese capital will soon become very tight, interest rate will rise while national consumption power will decline; and all Japanese export manufacturers will suffer losses.
The United States will of course bear the brunt of it. Taking into account the economic prospects for the future of Japan, the United States will likely to take the lead to withdraw its capital fund from Japan. This can result in the fall of Japan's stock market in a breaching manner. As it stands, quite a lot of fund managers have already invested in the Japanese shares. Nevertheless, when the Japanese stock market changes color after the earthquake, the fund redemption actions taken by the fund managers have also drastically been increased. In order to keep cash and in order to carry out fund redemption operations for their clients, the fund managers have no choice but to sell their Japanese stocks to maintain their cash flow. As such, when the Japanese share dropped drastically in the past two days, it triggered a chain reaction on the global stock market. This can exacerbate the decline in the Japanese and global share market. Japan also has large investments in the United States; it has now become an imperative for Japan to pull back its investment in the United States to rescue its stock market.
Negative Impact on Economy
Ever since Japan suffered the massive earthquake and tsunami, Japan has been quite cautious in reporting the damage caused by the calamity to prevent negative impact on its economy. Japan's Nomura Securities estimated the losses because of the disaster as $100 billion only. Meanwhile the Central Bank of Japan has taken the lead to announce the injection of $ 183 billion to the market in order to stabilize Japan's financial market. The Central Bank of Japan also hopes that Japan's banking system can release larger amount of fund to satisfy the capital demand of Japan's post-disaster economy and to further stabilize the country's economy. In the days to come, we can expect the Japanese Government to adopt a control mechanism to monitor the prices of oil, steel, cement, glass, food, as well as prices of daily necessities.
Yet more and more bad news is coming out from Japan's domestic scene without ceasing. The strong earthquake in Japan has severely damaged some crucial nuclear power plants as well as Japan's local enterprises and factories in various sectors resulting in an acute shortage of electricity supply. Toyota, the world's largest carmaker, might have to reduce its production to by at least 40,000 Toyota vehicles. When the Toyota plant in the disaster affected area stops operation, the daily profit of Toyota might reduce by $72 million. Other Japanese car makers such Nissan, Honda will also be affected.
The earthquake and tsunami affected disaster area is the base for the Japanese electronics, automobile, machinery industry, especially the semiconductor industry, where the demand of the integrated circuit for large factories in the western countries is met here. When these Japanese factories are halted, the global computer production will also be affected. Moreover, if the Japanese computer manufacturers cannot get its spare parts, the computer industry in Japan can become paralyzed. In addition, the insurance companies in Japan need money to pay for compensation for damage done by the earthquake and tsunami, these insurance companies will have no choice but to pull back their overseas investment. Japan is one of the countries with highest foreign direct investment. Japan's foreign direct investment is estimated at $1,000 billion. Among them, three quarters are bonds and stocks. While it is too early to tell if this round of sharp share market drop in Japan will speed up the withdrawal of Japan's overseas capital or slow down its capital flow process, the drastic drop in the Japanese share market has already upset the original share market deployment in Japan. Fortunately, Japan's share of global GDP ratio is declining. As such the impact of Japan's stock market on global economic growth may be limited.
Asia-Pacific Markets
As for the US stock market, at this stage of time, it is also at a weak and disadvantage situation. As a matter of fact the production activities and financial resources in the West have already suffered serious dislocation. In the past few years when bank interest was low, the floating capital could not find a good ground to invest and as a result, huge amount of hot money has poured into the stock markets particularly into the new Asia-Pacific emerging markets.
With the global stock market now risen to a considerable higher level, opportunist investors will begin to feel that the high interest day will come soon and so many of them will begin to leave the stock market to reap their harvest and gains and then move to engage in other forms of investment. As a result, stock market volatility is particularly significant in the West at this moment.
Lack of Power and Water Supply
For a long period of time, Japan is Malaysia's long-term major importer of raw materials. The earthquake and tsunami affected areas in Japan are mainly tourism, agriculture and forestry industries. These are not the main areas for Malaysia to import its key industrial spare part components. Therefore, the aftermath economic impact of Japan's earthquake disaster on Malaysia should not be too great. Of note is that the industrial supply chain between Malaysia and Japan is quite close and the earthquake and tsunami have damaged part of Japan's industrial areas there.
However, we believe that as long as Malaysian manufacturers can obtain short-term industrial supplies from other countries, the economic impact of it on Malaysia is very limited. Moreover, not all Japanese auto plants are located in the earthquake disaster area. Even if these industries are located in the disaster areas, if it is only a matter of lack of power and water supply, it will only be a short-term phenomenon. As such, the relevant Malaysian industries should not be over worried about the aftermath effect of earthquake in Japan.
Spreading Economic Risk
However, it remains a fact that for a long time, Malaysia's automobile industries have heavily depended on importing auto spare parts from Japan. When the Japanese automobile industries cannot supply what Malaysia needs regularly, it will become a big headache for Malaysia. The difficult experience for the Japanese industries in supplying the needed goods and industrial spare parts to Malaysia can still be recalled vividly when Kobe suffered massive earthquake in the past. Kobe is a cargo transit port for goods coming from the Western Hemisphere for forward transit to the East. But during the Kobe earthquake, the wharf and harbor in Kobe have been destroyed. As such shipping schedules from Kobe had been disrupted resulting in surging shipping charge and hike in the cost of imported goods from Japan.
In this round of natural disaster that happened in Japan, the impact of the massive earthquake and tsunami Japan encountered is much more massive and severe than that of the Kobe earthquake. In this regard, it is time for Malaysia to reduce its dependency on Japan for getting the required goods and industrial supplies. Malaysia must begin to diversify and decentralize its procurement sources so that the country can enhance its self-control over unexpected situation such as natural calamity in other countries. Malaysia must make more alternatives in its overseas procurement routes. Malaysia must guide and lead the local companies to spread the economic risk thinly to reduce the economic impact of it on the country's economy.
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