Japan shuts down as economic fears grow
by James Quinn and Jamie Dunkley - Telegraph
Japan's giant car industry has announced a major shutdown as fears grow over the economic impact of Friday’s devastating earthquake and subsequent tsunami which has crippled much of the north-east of the country.
The three largest motor manufacturers – Toyota, Honda and Nissan – said they would stop production at almost all of their domestic assembly plants. The safety of the workforce and deaths were cited as reasons behind the decision. The electronics giant Sony also said it would be shutting down production. Gerard Lyons, chief economist at Standard Chartered, warned of possible temporary price stagflation and an initial downward move for the country’s economy. "The timing of the disaster could not have been much worse," admitted analysts at Capital Economics, pointing to Japan’s economic contraction in the last three months of 2010.
The disaster forced the Bank of Japan (BoJ) to issue a statement, as it draws up plans for an emergency "quake budget". The BoJ said: "The bank will continue to do its utmost, including the provision of liquidity, to ensure stability in financial markets and to secure the smooth settlement of funds, in the coming week." Naoto Kan, the Japanese prime minister, asked BoJ to "save the country" after politicians from both sides of the political spectrum agreed on the need for the budget to introduce emergency spending to fund rescue and clean-up efforts and to resuscitate the economy.
Economists warned that the closures staged by the motor and electronics companies could be the tip of the iceberg, with other parts of industry likely to feel knock-on effects in the coming days. "Temporary closures of factories and oil refineries and the shutting down of power stations are likely to affect output throughout the country," said Wolfgang Leim of Commerzbank. "Economic output may therefore shrink again slightly in the first quarter."
Between them the three car companies closed 22 assembly plants, while Sony halted production at six of its domestic plants, including a Blu-ray factory where more than 1,000 workers were stranded yesterday. The closures are likely to damage Japan’s exports in the coming months, driving down economic growth yet further. "It is tough to know the extent of the damage and, therefore, also the cost," said Jim O’Neill, chairman of Goldman Sachs Asset Management. "Most of Japan’s recovery is driven by exports so the key is to make sure the yen doesn’t strengthen ."
Mr Lyons pointed out that after the Kobe earthquake in 1995 – which was in an economically more important region – the economy followed a V-shape performance curve, with an initial surge downward but with a strong rebound as policy stimulus and private spending returned.
Meanwhile, insurance analysts estimated that the earthquake could cost the global industry up to $10bn (£6.2bn). Although the Japanese insurance market is large, the amount of businesses and households that take out insurance cover is smaller than in Western markets, according to Risk Management Solutions. Most of the insured losses will be absorbed by global reinsurers such as Munich Re and Swiss Re, although companies operating in the Lloyd’s of London market will also suffer.
