Japan’s Earthquake Fallout

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JapanThe powerful 8.9 magnitude earthquake that struck northeastern Japan overnight, the strongest in the country’s history, is expected to slow an already fragile economic recovery in Japan and globally.

As many as 300 bodies have been recovered in the city of Sendai, the epicenter of the quake, and the figure is expected to climb. Hundreds more are injured or missing and up to 4 million people have no electric power. Mass transit and nuclear plants are shut and a nuclear advisory is in effect.

The U.S. State Department has alerted U.S. citizens to avoid travel to Japan, and warns that trains and subways are closed in the Tokyo area and many roads have been damaged.

The Japanese economy, the third largest in the world after The United States and China, clearly will be set back, albeit temporarily, as was the case when a 6.9 quake hit the city of Kobe in January 1995, leaving 6,425 dead, injuring 25,000, displacing 300,000 people, and causing some $132 billion worth of damage.    The Kobe earthquake was the worst in Japan since the Great Tokyo Earthquake in 1923, a 7.9 wallop that killed 140,000 people.

Speaking on CNBC this morning, Lawrence Summers, director of the White House National Economic Council, said Friday’s earthquake “clearly is going to add complexity to Japan’s challenge of economic recovery.” However, Summers added, “it may lead to some temporary increments ironically to GDP as a process of rebuilding takes place.”

Friday’s quake and the massive tsunami that followed triggered knee-jerk investor flight from risky assets. Global equity and commodity markets continue to plunge in the aftermath of the quake.

Japanese ports were all closed Friday, halting trade activity. Car and semiconductor manufacturers with plants in the northeast—including Honda Motor Co., Nissan Motor Co., Toyota Motor Corp. and Sony Corp.—shut down production and are still assessing the damage to their facilities.

Japanese stocks tumbled, led, not surprisingly, by insurance companies. Early estimates by analysts put the cost to insurance companies at about $10 billion, a figure that would have been much higher if the epicenter had been near to Tokyo.

Japan is the fourth largest market for U.S. goods, absorbing billions of dollars   worth of agricultural products, industrial machinery, transportation and telecommunications equipment, pharmaceuticals, household items and other products each year. In 2010, U.S. exports to Japan amounted to $60.5 billion, or 4.7 percent of total U.S. exports.

U.S. imports from Japan in 2010 amounted to $120.3 billion, or 6.7 percent of total U.S. imports. Passenger cars, automotive and computer accessories, industrial machinery, electric apparatus, engines and parts, semiconductors, machine tools and telecommunications and medical equipment top the list. 
   
Given the size of Japan’s import bill with the United States, even a temporary easing in purchases could impact the U.S. economy. U.S. export growth has been a key factor in lifting the economy. As Japan rebuilds, however, U.S. exporters could see strong sales of construction equipment and materials.   

Meanwhile, on the U.S West Coast Friday, the port of Los Angeles suspended cargo operations as a precaution against the tsunami on the Pacific Ocean, according to spokesman Phil Sanfield. The LA port and nearby beaches are expected to reopen once risk is diminished. Oregon and Washington state have also been affected.?

Economic activities connected to Los Angeles and other West Coast ports are going to be impacted in some shape or form, including shipping and restaurants.