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Wednesday, March 30, 2011

Japan’s 2011 Earthquake and Tsunami: Economic Effects and Implications for the United States

Dick K. Nanto, Coordinator
Specialist in Industry and Trade

William H. Cooper
Specialist in International Trade and Finance

J. Michael Donnelly
Information Research Specialist

The March 11, 2011, earthquake and tsunami that occurred in Japan followed by a nuclear crisis and shortage of electricity is having a large negative economic impact on the country but a lesser effect on world markets. Japan has lost considerable physical and human capital. Physical damage has been estimated to from $250 billion1 to as much as $309 billion,2 the latter figure being nearly four times as much as Hurricane Katrina ($81 billion) and roughly equivalent to the GDP of Greece and twice that of New Zealand. In excess of 27,000 persons in Japan are killed or missing, and more than 146,000 homes and other buildings have been totally or partially damaged.3 Analysts expect that over the next quarter or so, Japan’s economy will contract, but may expand because of rebuilding activity later in the year and into 2012. As the third largest economy in the world, Japan’s GDP at $5.5 trillion accounts for 8.7% of global GDP.

Congressional interest centers on humanitarian concerns, the impact on U.S. citizens and American companies in Japan, and the effects of the disaster on the exchange of both goods and services, and on Japanese and U.S. financial markets, interest rates, and the yen-dollar exchange rate.

The damage from the earthquake and tsunami is being compounded by the evacuations and uncertainty from the problems at the Fukushima nuclear reactors. Tokyo’s power supply is experiencing a shortfall of as much as a third of peak capacity, and the electrical grid is experiencing a current shortage of as much as a quarter of capacity. The earthquake also damaged plants and equipment far from its epicenter. Port facilities, sensitive electronic equipment, 2,035 roads and 56 bridges also were harmed. These were located in a wide area of the country that even reached Tokyo’s northern suburbs. The human toll also has been great with 10,102 persons killed, 17,053 missing, and another 2,777 injured (as of March 25, 2011). Higher radiation levels are being detected in Tokyo’s water supply and in leafy vegetables and milk from around the area of the Fukushima Daiichi Nuclear Plant. Depending on how long the nation’s electrical generating capacity is impaired, how long and how wide an area of evacuation because of radiation danger is continued, whether a widespread nuclear event occurs, and how quickly alternative sources can be found for critical electronic and automotive parts whose production has been curtailed, the negative economic effects could grow.

In recent decades, Japan’s growth rate has lagged behind that of the world, so it has not been a major contributor to global economic growth. The net impact of the disaster on global GDP, therefore, is expected to be relatively small (about 0.5 percentage points) with about half of that effect confined to Japan, itself.

As for U.S.-Japan economic relations, earthquake-related events in Japan are still unfolding; therefore, any economic impact assessments are at best preliminary. Nevertheless, it is likely that the impact of the earthquake and ensuing events on the bilateral economic relationship will be modest overall; however, the effects could be more profound in the near term and on specific sectors and firms for which trade and investment with Japan is particularly important.

Japan plays a major role in global supply chains both as a supplier of parts and as a producer of final products. In this age of just-in-time production processes, even a small disruption in the provision of a single component can wreak havoc on an entire product line. Japan’s production of automobiles, semiconductors, and electronics is likely to be affected the most, but companies in the United States that rely on Japan for critical components such as electronic parts and batteries or transmissions for electrical vehicles also will be affected. Tourist arrivals from Japan also are expected to fall.

Date of Report: March 25, 2011
Number of Pages: 15
Order Number: R41702
Price: $29.95

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