Business

Japan quake: Economy 'to rebound' after short-term pain

  • 14 March 2011
  • From the section Business
Houses are swept by water following a tsunami and earthquake in Natori City
Image caption Insurance cost estimates range between $14.6bn and $34.6bn with the total rebuild bill far higher

Friday's earthquake and tsunami have left parts of Japan's economy "frozen", but analysts forecast that it will bounce back later this year.

Some of the country's leading producers, including the world's biggest carmaker, Toyota, have closed all of their plants in the country.

Analysts at Nomura expect that loss of production to dent the economy during this quarter and the next.

But they suggested growth would return in the third quarter.

"This disaster has in effect temporarily frozen the world's third largest economy," said Richard Soultanian of NUS Consulting, which specialises in the energy supply industry.

The Japanese economy, the third largest in the world, shrank at the end of last year and had been expected to return to growth in the second quarter of 2011.

"We now expect the Japanese economy to take longer than we expected to exit its current soft patch owing to the earthquake and tsunami," said Nomura analysts Takahide Kiuchi and Okazaki Kohei.

Sharon O'Halloran, a professor of political economy at Columbia University, said: "The question is: does this finally push them out of the deflationary spiral and allow them to get their economy back on track, or does it push them deeper down?"

The country's global car giants are expected to be the amongst the worst affected.

Nomura suggested that annual operating profits at Toyota, Honda and Nissan would be dented by between 3% and 8% this year.

"We've stopped production as of today," said Andy Palmer, Nissan's head of production, in an interview with BBC World Business Report in Tokyo, in line with its rivals.

"It's not just our factories, it's also some of our suppliers. Some of our suppliers are even in the exclusion zone around the nuclear plant."

None of the carmaker feel able to predict when production will be resumed.

'Extreme damage'

The electronics industry was also expected to be badly hit, with a report by Goldman Sachs saying there would be "extreme damage" across the electronics industry supply chain in the near term.

Sony suspended production at eight plants in the affected region and said it was not sure when production would restart.

Toshiba, whose products include semiconductors and nuclear reactors, also said it did not know when it would be able to re-open its chip factory in northern Japan.

But further down the line, economists said the disaster could boost economic growth.

The rebuilding effort will mean a huge boom in construction spending.

Shares in many Japanese building companies have already gained sharply in anticipation of the work that will be heading their way, partly funded by insurance companies.

Clues

Analysts are looking back to the Kobe earthquake of 1995 for clues as to how the Japanese economy will react to the latest earthquake and tsunami.

Reconstruction following the Kobe quake cost $100bn (£62bn), of which $3bn was paid for by insurance.

The areas hit by the 1995 disaster were more industrialised, accounting for 12% of GDP according to Merrill Lynch Bank of America estimates.

By contrast, the region hit by the latest destruction accounts for just over 7%. But the area's nuclear facilities are an extra headache and estimates of insurance payouts for this disaster range between $14.6bn and $34.6bn.

Insurers and analysts stressed that it was still too early to accurately assess the damage caused by the quake, the most powerful to hit Japan.

"We can't say what the impact will be. The situation on the ground is changing," said Rolf Tanner, a spokesman for Swiss Re.

"It will take some time before we can come forward with an estimate of the losses on the ground."

Toshihiko Matsuno, senior strategist at SMBC Friend Securities, said: "When we look back at the Kobe earthquake, it took about a week to get an overall picture of the magnitude of the damage."

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