IMPACT OF THE EARTHQUAKE AND TSUNAMI ON THE JAPANESE ECONOMY
Short term shortages in Sendai A total of 27,149 businesses in three prefectures were damaged by the March 2011 earth. Among commercial and industrial businesses affected by the disaster in Iwate, Miyagi and Fukushima prefectures, 22 percent were closed temporarily or permanently. Progress has been slow in rebuilding main industries in coastal areas, such as seafood processing, and about 65,000 people were still looking for work at the end of 2011.
In March 2012, the Yomiuri Shimbun reported: Among listed companies, 1,356, or about 40 percent, have declared special losses due to the Great East Japan Earthquake in their full- or half-year earning results, according to Tokyo Shoko Research Ltd. The credit research firm said total losses had reached 4.07 trillion yen.The largest loss--2.1 trillion yen--was recorded by Tokyo Electric Power Co. because of compensation to victims of the nuclear disaster at the Fukushima No. 1 nuclear power plant. The company's figure alone accounted for about half of the total losses. [Source: Yomiuri Shimbun, March 12, 2012]
Tohoku Electric Power Co. suffered 173.1 billion yen in losses because of severe damage to its electric power facilities, while JX Holdings Inc. incurred a 137.4 billion yen loss as its refinery was damaged by the disaster. Sumitomo Metal Industries Ltd. incurred a 74.3 billion yen loss, and Nippon Paper Group Inc., 71.1 billion yen.
Initial Impact of the Earthquake and Tsunami on the Economy
The New York Times reported: The disruptions to Japan's $5 trillion economy, the third-largest in the world, and collective anxiety over the stricken reactors caused a bear run in the Japanese stock market that was felt across the region and reverberated globally. In the early days following the disaster the prospect of a nuclear catastrophe led to heavy selling on global markets, driving the benchmark index in Tokyo down more than 16 percent, while Frankfurt tumbled over 7.4 percent in Europe. Then after that the Tokyo market rose as foreigners snapped stocks of companies that had been oversold in panic selling. Billionaire Warren Buffet said that technology provided buying opportunities.
The Bank of Japan (BOJ), which injected a record $183.8 billion into the economy on the first workday following the earthquake and tsunami to maintain liquidity, poured in tens of billions of dollars more the next day. The Japanese central bank raced to shield the country’s economy and plunging financial markets from the impact of the devastating earthquake and tsunami by pumping liquidity into the financial system and easing monetary policy further through an expansion of asset purchases. Later the BOJ offered $12 billion in loans as quake aid and bout TEPCO bonds to keep their value propped up.
The United States and other major industrial nations in the Group of Seven (G-7) joined Japan in a highly unusual effort to stabilize the value of the yen by intervening in currency markets after the yen rose to a postwar record value of 76.25 yen to the dollar. It was the first time the G-7 had jointly intervened on currency markets in over a decade. The record was far below the previous record of ¥79.25 set in April 1995. Before the quake it was around 82 yen to the dollar. The spike was short lived. Several weeks after the quake the value yen stabilized at around 84 to the dollar. The surge too ¥76.25 is believed to have been at least partly the result of speculators buying up yen in anticipation of many Japanese firms being forced to repatriate capital in order to deal with the disaster.
After of the disaster, Japanese ports were closed, and so were several airports, including Narita International Airport, which serves Tokyo. This caused delays in shipping goods, and caused the prices of certain products and components to rise. In China prices for made-in-Japan products rose amid supply shortages. In some cases price gouging and other underhanded tactic were suspected as customers in some shops were told things like they had better a Japanese-made digital camera today as the price will go up tomorrow. But overall the impact was relatively modest and short-lived.
Websites, Links and Resources
Links to Articles in this Website About the 2011 Tsunami and Earthquake: 2011 EAST JAPAN EARTHQUAKE AND TSUNAMI: DEATH TOLL, GEOLOGY AND THEORIES Factsanddetails.com/Japan ; ACCOUNTS OF THE 2011 EARTHQUAKE Factsanddetails.com/Japan ; DAMAGE FROM 2011 EARTHQUAKE AND TSUNAMI Factsanddetails.com/Japan ; EYEWITNESS ACCOUNTS AND SURVIVOR STORIES Factsanddetails.com/Japan ; TSUNAMI WIPES OUT MINAMISANRIKU Factsanddetails.com/Japan ; SURVIVORS OF THE 2011 TSUNAMI Factsanddetails.com/Japan ; DEAD AND MISSING FROM THE 2011 TSUNAMI Factsanddetails.com/Japan ; RESCUE, RELIEF, REBUILDING AFTER TSUNAMI Factsanddetails.com/Japan ; LIFE FOR SURVIVORS AFTER THE TSUNAMI Factsanddetails.com/Japan ; CRISIS AT THE FUKUSHIMA NUCLEAR POWER PLANT Factsanddetails.com/Japan ; TEPCO, AND THE SAFETY OF FUKUSHIMA NUCLEAR PLANT Factsanddetails.com/Japan ; MELTDOWNS AT THE FUKUSHIMA Factsanddetails.com/Japan ; EARLY HOURS AT FUKUSHIMA AFTER THE TSUNAMI STRUCK Factsanddetails.com/Japan ; WHO’s TO BLAME FOR THE FUKUSHIMA Factsanddetails.com/Japan ; DAMAGE CONTROL AT FUKUSHIMA NUCLEAR POWER PLANT Factsanddetails.com/Japan ; RADIATION RELEASED FROM FUKUSHIMA Factsanddetails.com/Japan ; IMPACT OF EARTHQUAKE AND TSUNAMI OF MARCH 11, 2011 ON TOKYO, TRANSPORTATION AND ELECTRICITY Factsanddetails.com/Japan ; IMPACT OF 2011 EAST JAPAN EARTHQUAKE AND TSUNAMI ON THE ECONOMY Factsanddetails.com/Japan ; NUCLEAR ENERGY IN JAPAN Factsanddetails.com/Japan ;
Links to Articles in this Website About Earthquakes, Volcanoes and Tsunamis: VOLCANOS AND JAPAN Factsanddetails.com/Japan ; MAJOR VOLCANOS AND ERUPTIONS IN JAPAN Factsanddetails.com/Japan ; EARTHQUAKES AND JAPAN Factsanddetails.com/Japan ; EARTHQUAKES AND LIFE IN JAPAN Factsanddetails.com/Japan ; LARGE EARTHQUAKES IN JAPAN Factsanddetails.com/Japan ; KOBE EARTHQUAKE OF 1995 Factsanddetails.com/Japan ; LARGE EARTHQUAKES IN JAPAN IN THE 2000s Factsanddetails.com/Japan ; TSUNAMIS IN JAPAN Factsanddetails.com/Japan
Good Websites and Sources on Tsunamis: Wikipedia article on Tsunamis Wikipedia ; Surviving a Tsunami, Lessons from Chile, Hawaii and Japan pubs.usgs.gov ; Tsunami Warning System in Japan jma.go.jp/jma ; Tsunami Warnings from Japan Meteorological Agency jma.go.jp/en/tsunami ; Book: Tsunami: The Underrated Hazard by Edward Bryant. Tsunamis That Struck Japan Major Tsunamis in Japan in the 20th Century tsunami.civil.tohoku.ac.jp ; Major Earthquakes and Tsunamis in Japan in the 20th Century drgeorgepc.com ; 1933 Earthquake and Tsunami pdf file cidbimena.desastres.hn ; 1983 Tsunami drgeorgepc.com ; Report on the 1993 Tsunami nctr.pmel.noaa.gov ; Small Tsunami in 2010 reuters.com ;
Good Websites and Sources on Earthquakes: U.S. Geological Survey (USGS) National Earthquake Information Center earthquake.usgs.gov ; Wikipedia article on Earthquakes Wikipedia ; Earthquake severity pubs.usgs.gov ; USGS Earthquake Frequently Asked Questions earthquake.usgs.gov/learn/faq ; Collection of Images from Historic Earthquakes Pacific Earthquake Engineering Research Center, Jan Kozak Collection ; World Earthquake Map iris.edu/seismon ; Most Recent Earthquakes earthquake.usgs.gov ; Interactive Earthquake Guide guardian.co.uk ; USGS Earthquakes for Kids earthquake.usgs.gov/learn/kids ; Earthquake Preparedness and Safety Surviving an Earthquake edu4hazards.org ; Earthquake Pamphlet pubs.usgs.gov ; Earthquake Preparedness Guide earthquakepreparednessguide.com ; Earthquake Safety Site earthquakecountry.info ;
Earthquake Information for Japan Earthquake Information from Japan Meteorological Agency jma.go.jp/en/quake ; F-Net Broadband Seismography Network fnet.bosai.go.jp ; USGS Japan Earthquake Information earthquake.usgs.gov/earthquakes/world ; Tectonics and Volcanos of Japan volcano.oregonstate.edu ; MCEER Earthquake Engineering on Major Earthquakes in Japan in the 20th Century mceer.buffalo.edu ; Major Earthquakes in Japan in the 20th Century drgeorgepc.com ; Sesimic Hazard Map earthquake.usgs.gov ; Earthquake Density Map earthquake.usgs.gov ; Seismicity Map earthquake.usgs.gov ; Blogs About Japanese Earthquakes blogged.com/topics/japan-earthquake ; Geological Maps aist.go.jp/GSJ ; Earthquake Engineering and Disaster Prevention: Disaster Prevention Research Institute, University of Kyoto dpri.kyoto-u.ac.jp/web ; Japan Association of Earthquake Engineering jaee.gr.jp/english ; Earthquake Preparedness in Japan Earthquake Preparedness Survey whatjapanthinks.com ;U.S. Embassy Disaster Preparedness Checklist tokyo.usembassy.gov ; U.K. Embassy on Earthquake Preparedness v ; Report on Fastening Furniture pdf file iiasa.ac.at/Research/RAV ;Earthquake Preparedness Guide earthquakepreparednessguide.com ;
Earthquake Research in Japan: Headquarters of Earthquake Research Promotion jishin.go.jp ; Active Fault Research Center unit.aist.go.jp ; Institute of Geology and Geoinformation unit.aist.go.jp ; Tokai Earthquake Prediction from Japan Meteorological Agency jma.go.jp/en/quake_tokai ;Research Center for Earthquake Prediction, University of Kyoto rcep.dpri.kyoto-u.ac.jp ; Earthquake Prediction Research Center, Tokyo University eri.u-tokyo.ac.jp/ ; Earthquake and Science Museums Shinagawa City Disaster Prevention site city.shinagawa.tokyo.jp ; Earthquake Museum (Kita Ward, near the Nishigahara Station on the Naboku subway line), Tokyo Essentials tokyoessentials.com ; Honjo Life Safety Learning Center (Sumida Ward) simulates an earthquake and fire in a 3-D theater. There is also a room that simulates a storm with wind sped of 30 meters per second. Tokyo City PDF file bousai.metro.tokyo.jp
Recent Earthquakes in Japan : USGS Last Earthquake in Japan neic.usgs.gov/neis/last_event/world_japan ; Recent Earthquakes eri.u-tokyo.ac.jp ; Info for the Previous Week jma.go.jp/en/quake ; Major Earthquakes in Japan Wikipedia List of Earthquakes in Japan Wikipedia ; USGS Historic Earthquakes earthquake.usgs.gov/earthquakes/world/historical ;Major Earthquakes in Japan in the 20th Century drgeorgepc.com ; 1923 Tokyo Earthquake: 1923 Tokyo Earthquake Images eas.slu.edu/Earthquake_Center ; Great Kanto earthquake of 1923 dl.lib.brown.edu/kanto ; 1923 Tokyo Earthquake Photo Gallery japan-guide.com ; Earthquake Pictures: Earthquake Image Archive geot.civil.metro-u.ac.jp ; BBC Pictures of 2007 Niigata Earthquake BBC Pictures of 2007 Niigata Earthquake ; Kobe Earthquake Site seismo.unr.edu
Shortages and Losses After the Earthquake and Tsunami
7-11 in Sendai On the early days of the crisis there were breakdowns of transportation and distribution and panic buying and this led to shortages of milk, rice, bottled water and other essentials not only in the quake-stricken areas but also in Tokyo. In some supermarkets and convenience stores the shelves were stripped bare of almost everything. In the quick-stricken areas there were serious shortages of gasoline, kerosene and heating fuel---made worse by power shortages and the crisis at Fukushima nuclear power plant---and military ships and tanker trucks---braving destroyed ports and roads blocked with debris---were mobilized to deliver fuel to places that needed them most. But even there wasn’t enough. Some waited all night in lines that stretched over 1.7 kilometers to get gasoline.
In Japan there were shortages of drinks and insulations because the factories that produced bottle tops and insulation materials were badly damaged by the quake. Many sake and miso producers suffered from damage to their facilities and worked hard to restore their ability to make traditional and unique flavors.
Many products were not produced because of shortages of boxes, plastic film and packaging. Among these were paper diapers (shortages of tape used to wrap the diapers); milk (shortages of cartons and boxes that hold cartons ); canned food (shortages of cans); bleach (shortages of hydrogen peroxide); shampoo (shortages of surfactant); and books and magazines (shortages of glue and ink). The shortage of plastic film caused problems for a lot of food makers. It was caused by earthquake damage to a petrochemical plant in Kamisu, Ibaraki Prefecture where ethyl and other materials used make film were made. Some publishers postponed the release of magazines because they couldn’t get enough ink. That shortage was caused by earthquake damage to the Maruzen Petrochemical plant in Ichihara, Chiba Prefecture which made Diisobutylene, a key ingredient of ink.
Some people had difficulty getting their prescriptions filled because production of various medicines at drug factories in northern Japan and the Tokyo area was halted because of earthquake and tsunami damage. Ninety-eight percent of the supply of the hyperthyroidism drug levothyroxine sodium, for example, was cut off when production stopped at the Aska Pharmaceutical C factory in Iwaki, Fukushima Prefecture. Drug companies scrambled to import foreign replacements are encouraged doctors not to issue long-term prescriptions.
There were beer shortages in northern Japan and the Tokyo area as a result of severe earthquake and tsunami damage to Asahi, Sapporo and Kirin plants. Aerial images of the Kirin plant in Sendai showed masses of broken bottles and scattered cans and kegs, crumpled four-story-high storage tanks and damage to production buildings. That plant is expected to stay closed until September. At Tsukiji the problem was not a lack of supplies but a lack of demand as price collapsed for some domestic seafood because demand declines linked to radiation fears.
Research Institutes in Tsukuba in Ibaraki Prefecture---which includes the world’s largest facilities for elemental particle studies and Japan’s central facilities for disaster research---were badly damaged. Tremors dislodged electromagnets in particle beam accelerators and cut off electricity vital to many projects. Much of the facility’s research requires huge amounts of electricity to carry out. These activities were cut back to reduce consumption of energy that could be used by residents in the earthquake- and tsunami-hit areas.
Family registry data---legal documents as important as birth certificates and social security cards in the U.S.” for many devastated towns was irrevocably lost in tsunami waves that carried away government offices and computers. Local government had a hard time figuring out what to do with safes and other valuable items found during the recovery whose owners could not be identified. A housewife who went to a police station to try and locate her family safe told the Yomiuri Shimbun, “There are so many safes and most are either rusty or lost their original shape. I have no idea which one is ours.” She gave up trying to find it after trying her key in the locks of nearly 200 safes kept at the station.
Initial Impact of the Earthquake and Tsunami on Factories
fire in Sendai's industrial area A total of 1,135 of Japan’s 1,597 listed firms---including some of Japan’s best known companies’suffered earthquake and tsunami damage. Of these 529 companies said they suffered building damage. In the tsunami-devastated areas even factories two kilometers inland were wiped out. These included a Sony factory that made Blu-ray discs, a Hitachi factory that makes parts for nuclear reactors and Renesas Electronic factory that makes LSI chips. Inland a Shiseido shampoo was decimated by the earthquake. There many companies had to start from scratch in their rebuilding efforts.
The disaster also immediately affected the supply of all sorts of components used in myriad consumer electronics and other products. Toyota, for one, closed all its factories for at least a few days and it stock value tumble by as much as 6 percent. Globally there were shortages of everything from video tape to I-phones because key components were manufactured in northen Japan. [Ibid]
Steve Lohr wrote in the New York Times: Japan is a major exporter of cars, consumer electronics goods, and parts and sophisticated industrial machinery... A high-tech factory does not have to topple to halt production. A strong shaking, like that generated by the magnitude-8.9 earthquake can upset the delicate machinery used in production. Recalibrating the machines, analyst say, can take a week or two, crimping supplies.” “We do expect some upward price pressure because of this,” said Dale Ford, an analyst at IHS iSuppli, a technology market research firm. But it is too soon, Mr. Ford noted, to predict how much prices might rise, though it should not have a long-term impact.[Source: Steve Lohr, New York Times, March 11, 2011]
In the electronics industry some producers were unable to resume production because their factories were located within the 20-kilometer evacuation zone around the Fukushima nuclear power plant. In many cases companies that usually competed against one another to provide assistance to their common parts suppliers and helped each other secure needed parts.
Things could have been worse. Japan, for example, produces 40 percent of lightweight memory chips most commonly used for storage in digital music players, smart phones and tablet computers, estimated Jim Handy, an analyst at Objective Analysis, a research firm. But most of the plants that make such chips, and other electronics components, are south and west of Tokyo. [Ibid]
Short Term Economic Impact of the 2011 Earthquake and Tsunami
GDP shrunk 2.1 percent in the three months after the disaster (April, May and June). Before the earthquake and tsunami the economy of Japan was beginning to pick up after the Lehman shock and years of stagnation. Growth in 2010 was 3.9 percent. Factory output was up; unemployment was down; holiday sales around the New year were brisk.
In April 2011,the IMF cut the growth forecast for Japan from 1.6 percent for 2011 to 1.4 percent because of the negative impact of the March 11 earthquake and tsunami and possible power shortages in the summer. The OECD cut its growth forecast for Japan from 1.7 percent for 2011 to 0.8 percent with a strong rebound of 2.8 percent growth occurring in 2012. The Bank of Japan cut its projects from 1.6 percent to 0.6 percent with a rebound of 2.9 percent in fiscal 2012 and said that Japan will have no serious problems financing its recovery effort although industrial output could take some time to recover.
A total of 1,135 listed companies said they were forced to suspend operations or suffered other setbacks as a result of the disaster, Of these 481 said they had partial or light damage while said they had to suspend business operations. Industrial production fell by 15.3 percent in March not so much because factories were destroyed but by factories that produced key parts were damaged and shortages of these part upset the supply chain. Rolling blackout also adversely affected some enterprises. Half of the 105 major firms contacted in a Yomiuri Shimbun survey in April said they had been hit hard by the disaster,
As of mid April, businesses applied for $75 billion in loans from Japan’s largest banks; consumer confidence had deteriorated at its fastest pace on record; some shelves were still empty at convenience stores in Sendai
Immediately after the disaster the unemployment rate in march remained at 4.6 percent. Average wages in March fell, mainly as a result of the rolling blackouts. New vehicle sales 51 percent in April, the biggest ever drop for that month mainly due the effects of the earthquake and tsunami on production and supplies to dealers. In the bond market, TEPCO bond yields soared as the trouble company was expected to have to offer high interest rates to attract buyers and the sale of all bonds was down 50 percent from the previous year.
The Japan Research institute, a subsidiary of Sumitomo Mitsui Financial Group Inc., estimated that 450,000 to 650,000 jobs could be lost throughout Japan as a result of the disaster and the number of jobs lost might worsen as radiation fears stemming from the disaster at the Fukushima Daiichi nuclear power plant spread further. Some 140,000 to 200,000 workers may have lost their jobs in the three prefectures hardest hit by the disaster---Iwate, Miyagi and Fukushima--- where local farming and fisheries industries in particular incurred tremendous damage, according to the report. Some 120,000 to 250,000 jobs might be lost as automobile production is being disrupted due to the damage to the parts supply chain, the institute added. The institute also warned that a dramatic decrease in foreign visitors to Japan presents a serious concern on the labor scene, as companies in the tourism industry are going under. [Source: Kyodo, May 19, 2011]
Initially the basic cause of the downturn in consumption in eastern Japan was consumer "jishuku" (self-restraint) after the quake. This was exacerbated by public anxiety over the nuclear disaster, is depressing consumer spending, especially in the service sector. Not surprisingly land prices in the area of Fukushima nuclear power plant and places stricken by the earthquake and tsunami have plummeted.
Japan’s economy shrunk by a worse than expected 3.7 percent in annualized terms in the first quarter of 2011, The May 2011 trade deficit of ¥853.7 billion was the second largest on record as exports continued to be held up by parts shortage and factory and supply-chain disruptions. Economic growth for fiscal 2011-2012 will be less than 1 percent. The Japanese government has estimated it will be around 0.6 to 0.7 percent. The IMF said the Japanese economy will shrink 0.7 percent in 2011 but will grow 2.9 percent in 2012.
At major international meetings such as the APEC meeting in May 2011, Japanese representatives urged other countries to buy Japanese products to help Japan recover.
Impact of Electricity Losses on the Economy
Damage to Matsushima port In addition the dangerously crippled Fukushima Daiichi nuclear power plant, three other nuclear plants, six coal-fired plants and 11 oil-fired power plants were initially shut down, according to PFC Energy, an international consulting firm. By some measures, as much as 20 percent of the total generating capacity of TEPCO, the region’s dominant utility---or an estimated 11 percent of Japan’s total power---was out of service. [Source: New York Times]
According to the New York Times: “Until all the lost or suspended generating capacity is replaced, economists say, factories will operate at reduced levels, untold numbers of cars and other products will go unbuilt and legions of shoppers will cut back their buying---all taking a big toll on Japan’s economy. The greater Tokyo region represents one-third of the nation’s economic output.” [Ibid]
Masaaki Kanno, chief economist at JP Morgan Securities Japan, estimates that the country’s gross domestic product will shrink in the second quarter by about 3 percent on an annualized basis, with about half of that decline resulting from the power shortage. A recovery will gradually begin to take hold in the third quarter, he said, as the need to rebuild the northeast portion of Japan’s main island, Honshu, acts as a major economic stimulus. But the power shortage will be a drag on economic growth for some time to come. “We hadn’t initially expected the quake to impact the national economy to this degree,” Mr. Kanno said. But the lingering power shortages will be widespread, he said. Besides the direct effects on businesses, consumers “won’t go out as much and they’ll have to get home earlier,” he said, meaning they will not spend as much. The jeweler Tiffany & Co. was among those that cut its earning forecasts because of store closures and power outages. [Ibid]
Industry quickly recognized the importance of a coordinated response. Members of the Japan Automobile Manufacturers’ Association, including Toyota, Nissan and Honda, are considering apportioning full days of power cuts among themselves, according to the Nikkei newspaper, as they seek to avoid power cuts that wreak havoc on manufacturing equipment. [Ibid]
Initial Impact of the Earthquake and Tsunami on the Automobile Industry
The car industry was hard hit because about 30,000 parts are needed to make a car and many precision parts are so specialized they have no substitutes. This means that if production of these parts is disrupted then production of the cars made them also have to be halted.
Among the auto parts factories shut down by the disaster were: 1) Kanto Auto Works in Kanegasakicho, Iwate Prefecture which makes body parts assembly for Toyota; 2) Central Motors’s Miyagi in Ohiramura which makes body parts assembly for Toyota; ; 3) Keihin Corp’s Kakuda plants in Kakuda, Miyagi Prefecture which make vehicle parts for Honda; 4) Iwaki Diecast Co. in Yamamotocho, Miyagi Prefecture which makes auto parts; 5) Naime Japan Brake Co. in Namiemachi, Fukushima Prefecture which makes brake parts; and 6) Nissan’s plant in Iwaki, Fukushima which makes engines.
Toyota, Honda, Nissan, Mazda and other Japanese automakers shut down production for several weeks at their plants in Japan. But Toyota resumed production at all of its Japanese plants within six weeks after the quake. “Japan’s major automakers have long had contingency plans in place to keep supplies moving,” Lohr wrote. “Car companies did report damage to some factories and offices, and Honda said one employee was killed at a research center in Tochigi, north of Tokyo, when a cafeteria wall collapsed, Toyota, Japan’s largest automaker, reported that its car assembly plants had resumed production after a brief stoppage---though four factories operated by Toyota subsidiaries remained closed while workers were evacuated to safer areas. But most of Toyota’s Japanese production is done south of Tokyo, especially around Nagoya, including the Prius hybrid, which is built only in Japan.” [Source: Steve Lohr, New York Times, March 11, 2011]
The effects of the earthquake were felt not only in Japan by the Japanese car industry. Honda cut production by half at its plant in Swindon, England. Citreon temporarily laid off workers in its French plants to conserve parts from Japan. Ford closed a plant in Belgium for the same reason. General Motors had to temporarily shut down production and lay off workers because of a lack of parts from Japan. As a result of this many automakers took another look at the global supply chain strategy
Economic Impact of Tsunami on the Auto Market
Production at Japans’ automakers in terms of domestic output fell between 50 percent and 65 in March 2011, when the earthquake and tsunami occurred, and the months that followed main due to supply chain disruptions caused by a shortage of parts. Automobile production in April fell 60.1 percent from what it was the previous year. Only 292,001 vehicles were produced, down from 731,829 made in the same month a year earlier.
Auto factories that stopped production were able to restart production within a few weeks the plants were unable to operate at full capacity because of parts shortages, In the early going about 500 parts were hard to get. By late April 150 parts were hard to get. These included microcontrollers that regulate the engine and other systems. Brake parts and chemical products such as coating materials and paint---most of which modern 30,000-part cars can not be produced without. By May the number of kinds of parts needed by Toyota had fallen to 30.
Car sales in Japan in April 2011 were 51 percent power than the year before and even lower than April 2009 when the car industry was suffering during the fallout of Lehman Brother shock. In the United States, Bloomberg reported, “other automakers---particularly Hyundai, Kia, Ford and General Motors---were celebrating record first-quarter profits, largely on the backs of new, compact, fuel-efficient models. The success of small cars from Korean and American manufacturers comes at the expense of sales from Japanese brands.” The trend continued for several months. U.S. Sales for Toyota and Honda fell 21 percent in June while sales for the “Big Three” American autmakers recorded double-digit growth.
The release of new models was delayed and dealers suffered as their stocks of new cars dwindled as new supplies arrived from the factories. Even showrooms were empty, One salesperson told the Yomiuri Shimbun, “We get customers coming in, but we don’t have cars to sell them.
Supply chain disruptions caused by a dearth of parts is to expected to be fully repaired until the end of 2011. Even if that problem is solved quickly car companies still have deal with power shortages in the summer of 2011. Declines in the auto industry hurt the Japanese economy as a whole. It also hurts materials producers and parts suppliers and hurts the competitiveness of Japanese brands overseas.
Japanese Factories Recover After Quake
Reporting from Shibata-machi seven weeks after the disaster , Andrew Pollack wrote in the New York Times, “When the ground shook violently on the afternoon of March 11, the ceiling collapsed in part of the huge Ricoh copier factory here, exposing the vents and wires above. The offices at the Ricoh plant near Sendai are still in disrepair; workers have focused on restoring the factory and production. The ceiling is still not fixed. But employees are back at their posts, working under temporary lighting and wearing hard hats to protect themselves in case debris falls.” [Source: Andrew Pollack, New York Times, May 1, 2011]
“The factory may be a case study for the can-do recovery of Japan’s manufacturing industry. Only seven weeks after the huge earthquake in northeastern Japan collapsed the ceiling, toppled a huge water tank and upended assembly line equipment, the Ricoh factory here is nearly back to full production. And so, for the most part, is all of Ricoh, a nearly $25 billion company that makes copiers and other office equipment.” “The influence of this disaster is not as large as the world thinks,” Shiro Kondo, Ricoh’s president, said in an interview at the company headquarters in Tokyo. [Ibid]
“At varying speeds, Ricoh’s story is being played out all over the quake-affected parts of Japan. The pattern suggests that whatever the long-term effect of the natural and nuclear disasters on this country, manufacturing---the most important cog in Japan’s export-oriented economy---might largely rebound within a few months.”
“Without doubt, things are not back to normal yet. And some sectors, particularly automobile manufacturing, are suffering more than others. Still, almost every day companies are reporting progress on some of the hundreds of factories knocked out of commission by the quake or ensuing tsunami. The government estimates that 7 percent of Japanese factories were in the region heavily affected by the earthquake. A survey of 70 damaged factories released in late April by Japan’s Ministry of Economy, Trade and Industry found that nearly two-thirds of them had recovered while most of the rest in the survey group expected to do so by summer.” [Ibid]
“Shin-Etsu Chemical, a leading producer of silicon wafers used to make computer chips, said last week that it expected to return to pre-earthquake production levels by July. Sony has resumed operations at nine of its 10 halted factories, with the 10th expected to come online in phases from May to July.” [Ibid]
“Mr. Kondo, Ricoh’s president, said it would probably take half a year for the company to be fully back to normal. He declined to say how much the lost production and the lower economic activity expected in Japan this year would hurt the company’s sales and profits.”We have many problems, so it’s very difficult to think about the results of this year,” he said. His main concern was that a drop in industrial and consumer spending would mean less photocopying. Japan accounts for about 45 percent of Ricoh’s sales.” [Ibid]
Parts Shortages and Weak Emergency Planning
Andrew Pollack wrote in the New York Times, “The biggest susceptibility for Ricoh and many other companies has proven to be parts shortages. Although Japanese manufacturers have spread their factories around the world---Ricoh makes 70 percent of its products outside of Japan---many of those overseas plants often still depend on parts made in Japan.” [Source: Andrew Pollack, New York Times, May 1, 2011]
“For example, Tohoku Ricoh, as this plant is known, is the company’s only factory making a particular motor used in copiers. When the factory here went down, a giant Ricoh plant in Shenzhen, China---which supplies most of the Ricoh copiers sold in the United States---had to stop production for a full week. Ricoh is also dependent on parts from various suppliers in Japan, some of which suffered their own damage from the earthquake. That is forcing Ricoh to live off its inventory of certain computer chips and connectors. If production of those parts does not resume in the next couple of months, Ricoh might have to slow or halt production.” [Ibid]
“Another weakness was in emergency planning. Tohoku Ricoh, for instance, had 200 metric tons of backup water for cooling and ink production, in case water service was disrupted. But when the power also went out, it could not pump the water to where it was needed. Workers had to deliver the water, one ton at a time, by truck. The emergency plan at Ricoh’s headquarters was designed to cope with a big earthquake in Tokyo, not one in northeastern Japan. “We had a manual of what to do in such cases, but things did not go as written,” said Toshihiro Kenmoku, a leader of the recovery task force at headquarters. [Ibid]
Companies Cooperate and Workers Rally to Get Factories Open After Quake
Masatomo Onishi of Kansai University, who studied the recovery after the 1995 Kobe earthquake, told the New York Times that when a disaster strikes, Japanese companies tend to cooperate with one another and workers rally to the cause. [Source: Andrew Pollack, New York Times, May 1, 2011]
Andrew Pollack wrote in the New York Times, “That seems to be the case at the Ricoh factory here. Even many of the Ricoh workers who lost family members to the tsunami came to work. Some whose homes were destroyed or flooded slept on blankets on the floor of a factory conference room. With gasoline scarce, many rode bicycles. And with bathrooms not working because of blocked sewer lines, employees improvised with plastic bags.” [Ibid]
“When the earthquake occurred, powder started coming out of the walls and ceilings of the office of Hiroshi Tsuruga, the president of Tohoku Ricoh. “I felt like I would be crushed with the building and die,” Mr. Tsuruga recalled. The day after the quake, 70 factory employees gathered in the gym to plan the recovery, posting the plans on the walls. A similar scene was taking place at headquarters in Tokyo, where a conference room was converted into a war room for a recovery task force. The table soon became covered by phones, documents and packages of instant noodles. [Ibid]
One of the first tasks was to send 10,000 bottles of water, as well as food, blankets and other supplies, to Ricoh’s stricken factories using the company’s own trucks. Besides Tohoku Ricoh, three other Ricoh factories making a variety of products and one research center were damaged. But Tohoku Ricoh---which accounts for about $60 million in annual revenue, or one-fortieth of Ricoh’s total---posed the biggest challenge.” [Ibid]
“The priority was to restore production of ink and the motors made only at the Tohoku plant. Finally, by April 6, all the production lines were back in operation, with the exception of toner manufacturing. (Toner is used for machines that can print, copy and scan, while ink is used for some copiers.) Then, On April 7, an aftershock of magnitude 7.1 jolted the region. Electricity and water were knocked out again and many repairs undone. “Production went back to zero again,” said Hiroyuki Murakami, a general manager. It took until April 15 to restore motor production. [Ibid]
“At Ricoh headquarters, the war room has reverted to a conference room. But a new challenge looms. Because of the power plants disabled by the earthquake and tsunami, big companies like Ricoh will have to cut their use of electricity by up to 25 percent in the summer, which could also disrupt production.”
Importers Demand Radiation Testing from Japanese Exporters
Mamoru Kurihara and Koichi Uetake wrote in theYomiuri Shimbun, “Exporters are facing demands from an increasing number of countries to provide proof that their products have been screened for radiation. Companies and industry organizations are working to handle pressure for radiation screening in the wake of leaks from Tokyo Electric Power Co.'s Fukushima No. 1 nuclear power plant, but radioactivity tests are time-consuming and costly. [Source: Mamoru Kurihara and Koichi Uetake, Yomiuri Shimbun, April 24, 2011]
“Observers have raised concerns that pressure to conduct the tests could negatively impact the nation's exports. The Japan Iron and Steel Federation has said it plans to disseminate guidelines for radiation inspections. Fujitsu Ltd. and NEC Corp. also have prepared a system to independently conduct screening.” [Ibid]
“Nissan Motor Co. staged public radiation screenings of vehicles for export at its Oppama factory in Yokosuka, Kanagawa Prefecture. The factory selected 10 cars due to be loaded onto a carrier vessel and subjected each to an about-five-minute test that checked radiation levels in three places, including the hood. In an effort to reassure people, Japan Automobile Manufacturers Association Inc. Chairman Toshiyuki Shiga issued a statement that said all the association's member companies would voluntarily carry out radiation screening of their vehicles. At the Shanghai Motor Show...all cars on exhibit are subjected to radiation tests, regardless of their country of origin.” [Ibid]
“Tokyo Metropolitan Industrial Technology Research Institute in Tokyo, said it has received many requests to conduct radiation tests on products ranging from precision machinery to synthetic fibers. A radiation screening costs about $600 to $830. Local governments provide screening tests for free, but can perform them only so fast. "At most, we can inspect products for 30 companies in a day. And the entire process for one company---including the actual test and all the other procedures involved---takes about three to four days," an official of the Fukushima prefectural government said. [Ibid]
“Such circumstances will inevitably slow product shipments, observers said. Businesses can obtain documents from their local chambers of commerce and industry that state the radiation levels in the air around production centers. These documents can cost up to several thousand yen, and are free of charge in some areas. The first supplementary budget for fiscal 2011 included 700 million yen for Economy, Trade and Industry Ministry subsidies to help cover export firms' radiation-screening expenses. The ministry has also set up an insurance scheme that covers export companies whose products are rejected by other nations.” [Ibid]
Economic Impact of Tsunami in the United States and Abroad
“In the United States, The economic impact of the March 11 disaster has been particularly felt by retailers and manufacturers in certain parts of the country as supplies of high-quality parts and materials from Japan have been cut off, a recent report from the U.S. Federal Reserve Board has shown. The report found that seven of 12 districts across the United States had suffered a negative impact from the disaster on their regional economies. The districts were Atlanta, Boston, Chicago, Dallas, Minneapolis, Philadelphia and Richmond, Virginia. [Source: Yomiuri Shimbun, April 16, 2011]
“Released in mid April the Fed report said Japanese products ranging from automobile parts to paint were in short supply throughout the United States. Tires, for example, were running low in the Chicago district. Based on an emergency survey conducted late March, the Federal Reserve Bank of Minneapolis reported that 41 percent of manufacturers saw an unfavorable impact on their business. Deliveries of plastic resin, material important to the strong automobile-related and electric industries in the district, were behind schedule, according to the bank.” [Ibid]
“In the Atlanta district, temporary disruptions were reported regarding the distribution of Japanese automobile parts and IT products. Companies in the Boston district are concerned about possible disruptions in the supply of Japanese electronic parts, while companies in the Dallas district also have voiced growing concern over an insufficient supply of Japanese parts. The Federal Reserve Bank of Chicago said it is highly likely that electronic parts such as fuel injection sensors---parts indispensable to improving a car's fuel efficiency---will be in short supply. There are fears that these and a growing number of other parts may completely run out and not reach manufacturers.” [Ibid]
“U.S. companies that export products to Japan also have been seriously affected by the disaster. In the Dallas district, home to the head office of major semiconductor maker Texas Instruments Inc., there are companies whose ratio of export to Japan is high.” [Ibid]
“The disruption of supply chains after the March 11 earthquake and tsunami also has affected nonmanufacturers. Retailers in the Philadelphia district are unable to purchase Japanese electrical appliances, while car dealers in the Richmond district stopped accepting orders for models in particular colors due to low supplies of Japanese paint. The Fed report said the flow of Japanese products would not be normalized until September.” [Ibid]
Economic Recovery after the March 2011 Earthquake and Tsunami
By June, four months after the March earthquake and tsunami in 2011, supply chain disruptions had largely been fixed and key factories were up and running as reflected in Japan’s first trade surplus since the disaster. By September the recovery was more or less complete and the summertime energy restrictions were over and car manufacturers and electrical machinery makers were revving up production and showing signs of optimism despite the strong yen and debt problems in Europe. In the summer of 2011, consumer sales soared in the disaster-hit Tohoku region as people began buying replacement goods for things they lost in a big way.
In July 2011, U.S. industrial output recorded its best gain in seven months in part because the auto sector was coming back and boosting production as supply disruptions linked to the March 2011 earthquake and tsunami eased. In August exports rose for the first time in six months---albeit at a modest 2.8 percent---and this was also seen as a sign that progress was being made in the recovery from the disaster.
The Economist reported: “Lots of things could go wrong with the economy and public finances. The clean-up bill has raised new fears about the government’s ability to pay for it and bring Japan’s big public debt under control at the same time.”
Among the businesses that did well in the wake of the disasters were: 1) car companies that sold cheap mini-cars and used car dealers that sold vehicles to people who lost their cars in the tsunami; 3) bottled water companies; 4) enterprises that make and sell radiation detection devices; 5) producers of LEDs and software that measures electricity usage; 6) construction companies involved in reconstruction; and 7) companies that provided trucks and heavy machinery used to clean up debris.
Tourists and Foreigners after the Fukushima Crisis
A total of 531,000 non-Japanese left Japan is the four weeks after the March 11 earthquake and tsunami, including 244,000 who left in the first week. To describe the exodus the term “fly-jin” and “bye-jin” “an adaption of gaijin, the Japanese term for foreigner. Thirty-two embassies in Tokyo closed or shifted their operations to western Japan. But during the same four-week period, 302,000 foreigners arrived in Japan.
The number of foreign tourists visiting Japan fell by 73 percent in March 2011 from a year earlier. As of mid April, 560,000 people canceled hotel reservations nationwide in the wake of the quake. At least 80,000 foreigners canceled plans to visit Japan. Some foreign airlines cancelled flights. Normally busy shopping and tourist area were empty.
The earthquake and tsunami in 2011 had a devastating effect on tourism both in Japan and abroad in places that usually welcomed lots of Japanese tourists. Foreign tourist were reluctant to visit Japan because of worries about radiation and Japanese tourists cancelled their trips overseas mainly due, it seemed, to worries connected with the disaster. Business to and from Japan also fell off and several airlines cut back the number of flights to Japan.
The disaster was particularly a blow for Japan because it has commonly been thought of as a safe tourist destination. Chinese tour agencies suffered mass cancellations after Beijing sent buses to evacuate thousands of Chinese nationals from quake-stricken northeast areas. And issued a travel advisory. Japanese officials were frustrated that countries like the United States and South Korea issued travel advisories for all of Japan not just northeast Honshu where the earthquake and tsunami struck.
At one stage more than 50 nations urged their citizens to leave Japan or refrain from coming. By mid April countries such as Russia, France and the United States had lifted or eased their travel warnings. Still it took some time to recover. The number of foreign tourists in April and May were down 62.5 percent and 50.4 percent respectively from the previous year.
As part of the effort to lure visitors before the summer travel season ends, the Japan National Tourism Organization recently posted online the radiation levels for downtown Tokyo, which the tourism group says are lower than in tourist destinations such as New York, Singapore and Hong Kong. Among the group's efforts are online videos of race car drivers, ice skaters and other celebrities, including Lady Gaga, urging travelers to visit the country. [Source: Hugo Martín, Los Angeles Times, July 26, 2011]
In an efforts to attract foreign tourists back to Japan after visitor numbers plunged in the wake of the March 11 Great East Japan Earthquake, 41 international celebrities and cultural figures who love Japan have pooled their efforts to create an English-language guidebook called Travel Guide to Aid Japan . Among those that contributed were American fashion designer Tommy Hilfiger, French singer-actress Jane Birkin, American musician Jake Shimabukuro, Dutch author Karel von Wolferen, Indian conductor Zubin Mehta and Spanish chef Ferran Adria. They recommended places foreign tourists should visit.
But Japan's tourism industry faces several hurdles, including lingering fear among foreign travelers about potential radiation hazards and increasing fuel prices that keep airfares to Japan high.
Longer Term Economic Impact of the Earthquake and Tsunami
cleaning up and rebuilding The economic toll---including the damage to exports and international trade---of the earthquake and tsunami in 2011 defies a full reckoning. The twin natural disasters could cost Japan in excess of $300 billion, including $60 billion in insurance pay outs, with the government picking up much of the tab. The World Ban estimated it would take Japan five years to rebuild and recover from the disaster. Signs of economic loss could also be found in many corners of the globe, raising questions about the effect on the still-weak economic recovery in the United States, Europe and Japan.
Steve Lohr wrote in the New York Times: “As bad as the toll might eventually be in lives and property from Japan’s earthquake and tsunami, the fact that the disaster hit far from Japan’s industrial heartland will at least soften the economic blow, both at home and abroad. The epicenter was in and around the coastal city of Sendai, nearly 200 miles northeast of Tokyo, the nation’s population center, and well north of Japan’s primary manufacturing region running from Nagoya to Osaka and farther south and west.” “If this had been a couple hundred miles to the south, the economic and human toll would have been almost incomprehensible,” said Marcus Noland, a senior fellow at the Peterson Institute for International Economics. “In that respect, Japan dodged an enormous bullet here.”[Source: Steve Lohr, New York Times, March 11, 2011]
“The disaster could prompt the Japanese government to pump more money into the economy, analysts say, and is very likely to result in increased public spending on buildings and roads,” Lohr wrote. “And it could propel Japan’s already strong currency, the yen, even higher against the dollar and other global currencies, as Japanese money invested abroad returns to help in the rebuilding. In global currency trading on Friday, after the earthquake, the yen did edge higher.” [Ibid]
“Because Japan occupies an unstable slice of the earth’s crust and tremors are a routine part of life, Japan’s government, scientists and industry are almost continually engaged in moderating the impact of earthquakes through innovative building designs, strict construction codes and advance planning...And over the past two decades, the Japanese automakers have shifted a large portion of production of cars sold for the United States to American plants, while Japanese parts suppliers have set up shop in North America as well. “Given their contingency plans for earthquakes, and all the production done abroad these days, I’d be amazed if this had a real impact on Toyota or other leading Japanese car companies,” said Clyde V. Prestowitz Jr., a Japan expert and the president of the Economic Strategy Institute, a nonpartisan policy research group in Washington.
In 1995, after the devastating earthquake centered in Kobe, a port and industrial city, which killed more than 6,000 people and caused more than $100 billion in damage, the yen rose in value against the dollar 20 percent in the following two months. Some analysts predict that the yen will strengthen in the wake of this earthquake, too. Why would a disaster cause a nation’s currency to gain in value? In Japan’s case, the answer lies partly in the country’s high savings rate and sizable investments abroad.” “As households see their physical assets destroyed, need funds for reconstruction and become more risk averse,” Michael Hart, an analyst for Roubini Global Economics, wrote on Friday, “they are likely to repatriate their savings.” In doing so, they would convert their foreign holdings back into yen, increasing the demand for the Japanese currency, thus driving up its value. Still, a strong yen could pose problems for Japanese exporters, by making their products relatively more expensive on the global market.
For Japanese consumers, spending to increase household inventories of food and other daily necessities will probably increase, but outlays for luxury goods and services, notably tourism, will fall sharply, Masaaki Kanno, a Tokyo-based economist for JPMorgan Securities, predicted in a note to clients...The disaster, economists say, may well prod Japanese policy makers to increase government spending to stimulate the economy, despite adding to the nation’s sizable debt burden in the near term. And private investment on construction should increase as well. “There should be some positive impact because of the rush to rebuild,” said Edward J. Lincoln, a Japan expert at New York University’s Stern School of Business. “Perversely, you may have an economic benefit from this over the next year or two.”
Foreign Investors Attracted to Japan After the Disaster
An industry ministry white paper issued in July 2011, according to Kyodo, said that securing free trade agreements with other countries was important for Japan to recover from the aftermath of the March 11 disasters as well as to attract more foreign businesses. "If various costs are reduced by free trade agreements...it would give a boost to (companies') production activities that have started to recover," the white paper said. It "might be desirable" that Japan join a regional free trade accord currently being negotiated among the United States and some other Asia-Pacific countries, the paper added. [Source: Kyodo, July 9, 2011]
Japan’s stock market fell by a fifth immediately after the disaster. In the months that followed it would have have plummeted further were it not for foreign investors who pumped $60 billion into the marktes as opposed too domestic institional investors who pulled $25 billion out. The Economist reported: “The investment flow has been more steady than large. It has been targeted at certain sectors like machine tools, construction equipment and electronic parts, rather than across the board. And the money is said to be from large institutions which are cautious getting in and patient before getting out. Japan has also benefited from money that has been pulled out of the Middle East and North Africa this year. Traders say that investors from China and other Asian countries may be buying through intermediaries.” [Source: The Economist, June 2, 2011]
The attraction for foreign buyers is that Japanese shares are cheap relative to other markets. “Investors are buying value, not momentum,” says one fund executive. Mark Mobius, an emerging-markets investor at Franklin Templeton, says that now is one of the best times to buy Japanese equities in many years because their price/earnings ratios are comparatively low.
Foreign investors... are pinning their hopes on a bounceback to growth in the second half of this year thanks to reconstruction spending. Many are expecting a boom in corporate profits on the back of buoyant exports...Soon after the earthquake, tsunami and nuclear crisis, many foreigners (called gaijin in Japanese) fled the country. Insulted Japanese nicknamed them flyjin. Even the head of the Tokyo Stock Exchange, Atsushi Saito, heaped scorn on them. But maybe they now deserve some credit for greasing the wheels for the market recovery. Time to change their name again, to buyjin.”
Japanese Economy in Late 2011 and 2012
“The economy shrank 0.7 percent in the October -December 2011 quarter. According to The Economist: “Radiation fears hurt exports. A strong yen walloped profits. Floods in Thailand interrupted the distribution of electronics and car parts. Corporate-governance scandals cast a black cloud over blue suits nationwide. [Source: The Economist, December 17, 2011]
In December 2011, Kyodo reported, Nikkei index lost about 17 percent during 2011 to mark the lowest year-end close since 1982, affected by the yen's rise to a postwar high, the March earthquake-tsunami disaster and Thai floods. The 225-issue Nikkei Stock Average ended up at 8,455.35, the lowest year-end closing level since the index finished in 1982 at 8,016.67. The broader Topix index of all First Section issues on the Tokyo Stock Exchange finished at 728.61, falling around 19 percent on the year. [Source: Kyodo, December 31, 2011]
In 2012 things weren’t much better. The 225-issue Nikkei Stock Average plunged from above 10,000 yen at the end of March 2012to the 8,900 yen level in May due to the political turmoil in Greece. Bloomberg reported: The yen’s post-2008 surge has been accelerating in tandem with Europe’s meltdown. Japan’s export industry, the lifeblood of the economy, is reeling. Profits are down and so is market share amid competition from South Korea (KOSPI) and China. Disruptions after a giant earthquake in March 2011 further dented Japan’s standing as a manufacturing center and as a reliable link in the global supply chain. Calls for radical action on the yen are getting louder by the day. [Source: William Pesek, Bloomberg, July 30, 2012]
But still unemployment wasn’t bad, especially compared the 8 percent rate in the U.S. And the 20 percent rate in Spain. Unemployment fell rate was 4.3 percent in June 2012. Unemployment fell to 4.4 percent in May 2012 from 4.6 percent in April and was 4.5 percent in February and 4.6 percent in January 2012. Unemployment fell to 4.1 percent in September 2011 from 4.3 percent in August, according to figures from the Internal Affairs ministry showed. [Ibid]
Record High Value of Yen
In late August 2011, the dollar briefly hit a record low of 75.95 yen on the New York foreign exchange market, breaking the previous record 76.25 yen set on March 17th after the March 11th disaster in northeastern Japan. The gain occured after a vice finance minister expressed caution on monetary intervention. The dollar was later traded at mid-76 yen, still hovering around historic lows against the yen.
Japanese monetary authorities say the rapid rise of the yen will have negative impact on the economic recovery from the March disaster, further damaging Japan’s already-hurting exporters and possibly causing firms to transfer production outside Japan. The prime minister's office was conspicuously silent on the matter. Aides quoted the prime minister as saying he intends to "keep watching the situation" for the time being before deciding whether the government and the Bank of Japan should intervene in the markets again or launch further quantitative monetary easing.
Many officials close to Kan believe there is little Japan can do to rein in the yen, other than a market intervention and quantitative easing, because the yen's climb has been fueled by financial unrest in the United States and Europe, sources said. "The prime minister can't afford to worry about that" because he is tied up with his pending resignation, one aide said. "The fact that investors are gobbling up the yen despite the political situation here shows just what bad shape the economies of the United States and Europe are in." After the credit rating of long-term Japanese government bonds was downgraded in January, Kan caused an uproar when he admitted he was "out of touch with such things." [Source: Yomiuri Shimbun, August 21, 2011]
A few days later the dollar briefly rebounded to ¥77 on hints by government officials there might be some kind of intervention. Finance Minister Yoshihiko Noda said Japan will take decisive action against the yen’s sharp rise. The change in the yen’s value was not much as currency players reasoned that an intervention would not have much of an impact if it were taken.
On how all this relates to the dollar, William Pesek of Bloomberg wrote: “Investors display an obvious preference for yen over dollars. That the IOUs of a debt-ridden, aging, politically adrift nation smarting from a huge earthquake and nuclear crisis seem safer than U.S. Treasuries says it all.
Government Intervenes on Yen in October 2011
In late October 2011, the Japanese government and the Bank of Japan intervened in the currency market, selling the yen and buying the U.S. dollar as the yen hit another record high. "I've repeatedly said we would take decisive steps against speculative moves, but [speculators'] one-sided actions, which do not reflect Japan's real economic state, have continued," Finance Minister Jun Azumi said. "I therefore ordered the market intervention at 10:25 a.m." The intervention was the first since the government and the central bank staged a unilateral intervention in August. The intervention also was unilateral, Azumi said, adding the government informed U.S. and European authorities of Japan's position and national interests. [Source: Yomiuri Shimbun, November 1, 2011]
“The Yomiuri Shimbun reportedly: Monetary authorities apparently concluded that if the yen remained in the historically high 75 yen-range against the dollar, the country's exports would stagnate and corporate performance would suffer. That would cause the domestic economy, which has been gradually recovering since the Great East Japan Earthquake, to lose its momentum and slip back into recession. [Ibid]
“The intervention came as the yen soared to 75.32 yen against the dollar in Oceanian trading, exceeding the previous postwar high of 75.67 yen marked on the London exchange market. "[It was a level] that could not be overlooked. The decision was made this morning," Azumi said. The week before the yen reached new postwar highs in the New York and London markets for three consecutive days. There also was increased yen-buying, dollar-selling pressure in the market due to speculation the U.S. Federal Reserve Board will further ease its monetary policy at its Federal Open Market Committee (FOMC). [Ibid]
“The intervention marked the third since the March 11 disaster. Azumi declined to comment on the exact size of the latest intervention, but market observers believe Japanese authorities injected at least the same amount as they did on August 4, 2011, about 4.5 trillion yen. The August 4 intervention was a record high in terms of single-day volume. [Ibid]
“Afterwards the value of yen lowered some. For much of the remainder of 2011 and in 2012 it was between 75 and 80 yen to the dollar. Tomoko Echizenya wrote in the Yomiuri Shimbun it remained uncertain whether Japan's unilateral intervention would be sufficient to reverse global dollar-selling pressure as the current exchange rate mainly reflects developments in the U.S. and European economies. [Ibid]
“The 75 yen-range against the dollar poses a serious threat to the Japanese economy. The Bank of Japan's quarterly tankan survey in September showed that large manufacturers in the country projected a yen-dollar exchange rate of 81.15 yen for fiscal 2011, substantially weaker than the actual figures. If export-oriented companies accelerate moves to relocate their plants overseas it could hurt the employment situation in Japan. [Ibid]
Japanese Economy Begins to Pick Up with Six Percent Growth in the Third Quarter of 2011
Hiroko Tabuchi wrote in the New York Times: “Japan’s economy grew at a 6 percent annualized rate in the third quarter, signaling a strong recovery after the devastating tsunami in March. Still, a slowing global economy and a stubbornly strong yen cloud the outlook for Japan, the world’s third-largest economy. Helped by a rebound in exports and consumption, the gross domestic product expanded 1.5 percent in the three months through September, compared with the previous quarter, numbers released by the Cabinet Office showed. The widely expected uptick, equivalent to an annualized rate of 6 percent, was the first expansion in the Japanese economy in four quarters. [Source: Hiroko Tabuchi, New York Times, November 13, 2011]
“The rebound underscores the speed at which Japanese industry has been able to get back on its feet after the March 11 earthquake and tsunami, rebuilding factories and re-establishing supply chains severed by the destruction. Exports jumped 6.2 percent as manufacturers got production back on track. Private consumption, which accounts for almost two-thirds of Japan’s economy, grew 1 percent, helped by a rebound in consumer sentiment and replacement demand in the tsunami zone. [Ibid]
“Still, policy makers and economists also worry that the punishingly strong yen of recent months as well as weak growth in major trading partners, like the United States and China, will take a toll on Japanese exports. The crisis at the Fukushima Daiichi nuclear plant, meanwhile, has thrown the country’s energy policy into disarray and cast a pall over Japan’s recovery. [Ibid]
“Because global investors see the yen as a safe haven in times of global economic turmoil, its value has climbed to historic highs in recent weeks amid fears over Europe’s debt crisis. A strong yen hurts the competitiveness of Japanese exports and erodes the value of exporters’ repatriated earnings. [Ibid]
“The government is also spending heavily to support post-tsunami reconstruction. In November 2011 the lower house of parliament approved a 12 trillion yen ($155 billion) spending package aimed at kick-starting recovery on the ravaged northeast coast of the country, bringing total spending pledged so far to 18 trillion yen ($233 billion). But Japan is already saddled with public debt more than twice the size of its $5 trillion economy. Unlike with Italy or Greece, however, investor confidence in Japan’s government bonds remains high, allowing the country to continue borrowing at low rates for the time being. [Ibid]
Japan Logs First Trade Deficit in 31 Years in 2011
Japan logged its first annual trade deficit in 2011 for over 30 years, Reuters reported, as the aftermath of the March earthquake raised fuel import costs even as slowing global growth and the yen's strength hit exports, threatening to erode the country's ability to fund its huge public debt with domestic savings. Few market players expect Japan to immediately run a deficit in the current account, which includes trade and returns on the country's huge past investments abroad, as a steady inflow of profits and capital gains from overseas outweigh the trade deficit. [Source: Reuters, January 26, 2012]
But the trade data underscores a broader trend in which Japan's competitive edge in the global market is eroding and it is increasingly reliant on fuel imports due to the loss of nuclear power, with reactors staying closed after routine checks due to public safety fears following the March disaster. "What it means is that the time when Japan runs out of savings -- 'Sayonara net creditor country'---that point is coming closer," said Jesper Koll, head of equities research at JPMorgan in Japan. "It means Japan becomes dependent on global savings to fund its deficit and either the currency weakens or interest rates rise.” [Ibid]
“Japan logged a trade deficit of 2.49 trillion yen ($32 billion) for 2011, Ministry of Finance data showed, the first annual deficit since 1980. Total exports shrank 2.7 percent last year while imports surged 12.0 percent, reflecting reduced earnings from goods and services and higher spending on crude and fuel oil. [Ibid]
“Bank of Japan Governor Masaaki Shirakawa said he did not expect Japan to continue logging a trade deficit as a trend and did not foresee the country's current account balance tipping into the red in the near future. But Japan's days of logging huge trade surpluses may be over as it relies more on fuel imports, which may weaken the yen in the longer term. Running a current account deficit would spell trouble for Japan as it means it cannot pay the cost of financing its huge public debt without overseas funds, although few analysts expect this to happen in the foreseeable future. ($1 = 77.7100 Japanese yen)
In April 2012, the Japan Times reported: Japan logged a record ¥4.41 trillion trade ($54.2 billion) deficit in fiscal 2011 (April 2011 to March 2012) as the March 11 disasters, the strong yen, reliance on foreign energy and Europe's debt crisis all rattled the economy throughout the year, the Finance Ministry said. The quadruple threat forced exports down 3.7 percent from the previous year to ¥65.28 trillion. Imports grew 11.6 percent to ¥69.69 trillion. [Source: Jun Hongo, Japan Times, April 20, 2012]
Foreign Ownership of Japanese Debt Climbs While Bonds Cover Almost Half the Japanese Budget
In March 2012, Kosaku Harioka wrote in the Wall Street Journal, “Foreign ownership of Japanese government debt rose to 8.5 percent at the end of December, from 6.5 percent a year earlier, putting it just under the record-high level of September 2008, as overseas investors sought the perceived safety of Japanese bonds amid the European sovereign-debt crisis. The total of Japanese government debt, including short-term treasury bills, held by investors from outside Japan reached a record ¥78 trillion ($947 billion) at the end of last year, out of a total of ¥920 trillion, according to Bank of Japan data. [Source: Kosaku Harioka, Wall Street Journal, March 25, 2012]
“Late last year, amid growing risk over various sovereigns overseas, the relative stability of Japanese government bonds was valued," a Bank of Japan official said at a briefing. "The ownership ratio by overseas investors rose as a result." Of the ¥78 trillion of Japanese government debt held by non-Japan residents, roughly 65 percent was in longer-term bonds and the rest was in shorter-term bills. In the quarter ended September 2008, just as the Lehman crisis was starting to hit the global financial system, the ownership ratio by non-Japan residents, including foreign governments and institutional investors, rose to 8.6 percent. That is the highest on record since comparable data became available in December 1997. [Ibid]
“Although the share of JGBs held by foreign accounts remains below 10 percent, overseas investors "are raising their positions as important investors," the central-bank official said. Japan's overwhelmingly domestic ownership of its debt has been seen as a strength for the Japanese-government-bond market, helping Japan to avoid a Greece-style crisis even though its gross debt ratio, at 200 percent of gross domestic product, far exceeds Greece and all other industrialized nations. Foreign holders are seen as more likely to sell if Japan's economic outlook deteriorates or its fiscal picture worsens. At the same time, analysts say that a moderate rise in foreign ownership is a positive for the market because it helps to diversify from the historical dependence on domestic banks and insurers, which together account for 65 percent of all JGB holdings. [Ibid]
“In December 2011, Kyodo reported: “Japan's reliance on debt in the initial budget for fiscal 2012 is set to hit a new high of around 49 percent---the worst level ever, officials said. The reliance on debt highlights the difficulties facing Prime Minister Yoshihiko Noda, who has said Japan remains committed to restoring its fiscal health, which is the worst among the major developed countries. [Source: Kyodo, December 25, 2011]
The Cabinet will approve the draft general-account budget for fiscal 2012---a ¥90.33 trillion ($1.16 trillion) package “the officials said. The size of the budget is smaller than the ¥92.4 trillion for fiscal 2011, which was the biggest ever for an initial budget. Of the total, around 49 percent, or ¥44.24 trillion, will be raised through new government bond issuance, breaking the previous record of 48.0 percent set by the initial fiscal 2011 budget. [Ibid]
“Tax revenues for fiscal 2012 are projected at ¥42.34 trillion, but the government is also counting on nontax revenues, including surplus funds transferred from other budget accounts. That amount, however, excludes the more than ¥3 trillion allocated under a different account earmarked for reconstruction work following the March 11 earthquake and tsunami. This means the government will have to keep struggling to balance the need for crucial spending with its resolve to restore its fiscal health. The government will also spend about ¥22 trillion just to service existing debt
Nikkei's 23 Percent Gain in 2012 Is Best since 2005
Brad Frischkorn wrote in the Wall Street Journal: “Japan's stocks closed out 2012 with the seventh gain in nine sessions, and the Nikkei Stock Average logged a 23 percent climb for the year, its biggest percentage rise since 2005. With a 10 percent surge since the start of the month, the benchmark index ended the year at 10395.18, its highest closing level since March 10, 2011, the day before a powerful earthquake and tsunami struck the northeast region of the country. It also is the first full-year rise in three years. [Source: Brad Frischkorn, Wall Street Journal, December 28, 2012]
A steadily weakening yen and persistent interest from foreign investors have been key to the gains, as players hold out hope that the new Liberal Democratic Party of Japan leadership will be able to engineer an end to deflation and put the nation on a path to economic recovery. Political rhetoric and fervent hopes have seen the yen fall from its perch over the last six weeks, losing more than 8 percent against the dollar and more than 12 percent against the euro. "Overseas investors continue to key on the falling yen," said Mitsushige Akino, chief fund manager at Ichiyoshi Investment Management. "Not many expected the market to rise this far this fast toward year-end, forcing a lot of short-covering as well.” [Ibid]
A weak yen is key for Japan's important export industry to survive. With global central banks embarking on robust monetary easing policies over the last few years to avert a global financial industry collapse, the Japanese currency has surged against the dollar and the euro in recent years. That encouraged many investors to trim their holdings of Japanese stocks, and the Nikkei lost 3 percent in 2010 and 17 percent in 2011. It remains down 40 percent from end-2006. [Ibid]
The Bank of Japan embarked on more easing steps in the first quarter, pushing the yen down and the Nikkei through 10000. But subsequent worries about Europe's financial health, as well as robust loosening from the U.S. Federal Reserve, sent the dollar plunging anew and the yen rising. The currency began a noticeable reversal in mid-November, when snap elections were called for the lower house of parliament. The unpopular Democratic Party of Japan was swept from power a month later, putting the LDP back at the controls with an overwhelming mandate for change. [Ibid]
LDP leader and now Prime Minister Shinzo Abe has been pushing for more aggressive central-bank policy, including a 2 percent inflation target; the country continues to fight deflation, and the central bank has a 1 percent inflation goal. Armed with the ability to nominate a new Bank of Japan governor in 2013, investors see this goal as having a fighting chance to actually succeed. "Hopes for looser central bank policy and a weaker yen remain firm," said Hiroichi Nishi, general manager of equities at SMBC Nikko Securities. "The stalled U.S. budget talks remain a focus of attention, but players are not willing to let a good Japan trade opportunity go to waste.” [Ibid]
Image Sources: 1) U.S. Navy except Kelly Kaneshiro (shortage shots)
Text Sources: New York Times, Yomiuri Shimbun, Daily Yomiuri, Washington Post, Los Angeles Times, Kyodo News, National Geographic, The Guardian. Times of London, The New Yorker, Time, Newsweek, Reuters, AP, AFP, and various books and other publications.
Last updated January 2013