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Monday, May 9, 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

Renée Johnson
Specialist in Agricultural Policy

The March 11, 2011, earthquake and tsunami that occurred in Japan followed by the nuclear crisis are having a large negative impact on the economy of Japan but a lesser effect on world trade and financial markets. Japan has lost considerable physical and human capital. Physical damage has been estimated to be from $195 billion to as much as $305 billion. (Greece’s GDP is $330 billion.) In excess of 27,000 persons in Japan are killed or missing, and more than 300,000 homes and other buildings have been totally or partially damaged. The negative effects of the earthquake and tsunami have been compounded by the continuing crisis at the Fukushima nuclear reactors; the resulting evacuations, radioactive contamination, and shortages of electricity; continuing aftershocks; and the extensive damage to infrastructure, homes, manufacturing plants, and other buildings.

The earthquake-related events in Japan are still unfolding, and each round of economic assessments seems more and more pessimistic. Analysts expect that over the next quarter or so, Japan’s economy will contract and may fall into recession, but it may begin to expand later in the year because of rebuilding activity. Much depends on whether the damage from the nuclear plant can be contained, the speed at which electrical capacity can be restored, and how quickly Japan’s industrial base can recover. As the third-largest economy in the world, Japan’s GDP at $5.5 trillion accounts for 8.7% of global GDP. The net impact of the disaster on global GDP is that it is expected to shave about a half percentage point off global economic growth with about half of that effect confined to Japan, itself.

Congressional interest on the economic side centers on humanitarian concerns, radioactive fallout reaching the United States, the impact on U.S. citizens and American companies in Japan, the effects on trade and supply chain disruptions, and increased volatility in Japanese and U.S. financial markets, interest rates, and the yen-dollar exchange rate.

The impact on U.S. imports from and exports to Japan is expected to be modest as a proportion of overall trade, but particular sectors or companies may be affected considerably. The United States already has banned imports of certain vegetables and milk from the vicinity of the damaged nuclear reactors and is monitoring other foods for radiation. 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-intime 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 travel both into and out of Japan also has been falling.

There also is concern over speculation in currency markets and repatriation of assets back to Japan that raised the value of the yen before the G-7 monetary authorities in March intervened to weaken it. Another concern is that Japan’s national debt, already at 200% of GDP, will rise significantly as the government borrows to finance reconstruction. This may raise interest rates in Japan and further complicate recovery efforts or, in the worst case, trigger a sovereign debt crisis and loss of confidence in Japanese government bonds.

Legislation: H.Res. 172, S.Res. 101. 

Date of Report: April 20, 2011
Number of Pages: 26
Order Number: R41702
Price: $29.95

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