Recently, a globally recognised gigantic industrial nation, Japan, witnessed a high magnitude earthquake which triggered a tsunami resulting in huge humanitarian concerns; as it lost about ten thousand lives and property worth $200 billion. Following this, many questions have been raised in the minds of world economists as to what will be the effects of these disasters on Japan’s economy and the other nations of the world?
Apart from United State which is the world fist largest economy, before China came to the fore in the middle of 2010, Japan was referred to as the world’s second biggest economy for its remarkable contributions to the global capital markets with its industrial equipments and manufacturing of electronics and automobiles.
In analyzing the internal effects of the disaster to the Japanese economy, the Chief Economist of Nomura Research Institute in Tokyo, Richard Koo observes that the country as a whole might have suffered about 12% decline in its capacity to supply electricity. Since the elasticity of electricity usage to GDP is about 2%, which means that Japan’s GDP might have shrunk by as much as 6% in the wake of the disaster which is an additional shock to the economy.
The calamity has resulted in serious damages to the electricity power generation which may have greater negative impact on the economic growth of that nation and those that rely heavy on it especially as we witness problems of workforce shortage and fast decline in supply chains.
Meanwhile, the big uncertainty about this disaster is that about 10% of electricity generation capacity may be offline for a few months, until the rise of oil and gas-fired plants. A situation that has undesirable consequences on the Japanese industrial sectors with general shut down of some steel plants and automobile factories. Loss of production facilities implies that there will be less capital available to use in production. The breakdown of supply chains and distributional channels added to the problem and could be felt globally.
Besides, a simple disruption in Japan economy, as a nation with globalized supply chains for complex designed products, many industrial centres in other nations who rely on Japanese parts for production might shutdown their industries.
Given the disruptions in Japanese industrial activities, the impact on global supply chains could also be felt in other sectors including telecommunications, consumer electronics and to some extent fashion and entertainment. That is, 6% decline in Japanese economy as the third largest GDP in the world and one of the most active trading partners to various countries.
In specific terms, Japan which is regarded as second producer of the world automobile parts or sub-assembly plant, usually design to high specifications and which cannot be easily replaced from other sources. For instance, recently, GM announced the temporary shutdown of an assembly plant in Shreveport, LA due to lack of parts from Japan. This is followed by other automobile industries such as Nissan which announced the postponement for the full resumption of an entire auto assembly plant, as Japanese auto-makers remains uncertain; Honda which has warned that full production may not restart until May.
In Japanese international economic linkages, the ongoing effects of the disaster would affect many economies in close relations with the countries such as United State, Europe, Asian countries, Germany, France, Italy and Africa nations. For instance, it is reported that on the import side, there would be an interruption of Japanese supplies that could disrupt production, especially for Japan’s U.S. based auto plants.
The disaster may threaten the Mexico and Japan Economic Partnership Agreement (EPA) implemented in 2005. The EPA represents a comprehensive free trade agreement that has contributed to the expansion of commerce, investment, and tourism between the two countries. The recent Indo-Japan trade collaboration which aimed to boost the technological innovation and infrastructural development in India is another progress that may be affected; others are Japan-Taiwan bilateral trade agreement signed in the year 2007.
In the year 2010, Government of Canada sought for a comprehensive economic partnership agreement with Japan, as imports from Japan to the Canadian economy hits $12.3 billion. Definitely, the effects may call for further scarcity in Japan export to Canada. Other nations having economic relations with Japan that may be affected include Malaysia, Philippines and Australia among others.
As for Africa continent that derives its technological requirements from developed world, especially Japan will be seriously affected, just as Nigeria could not hold its senatorial elections at a scheduled date due to shortage of voting materials from Japan which was hit by a tsunami.
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