How Japan’s trauma affects the rest of Asia

The disaster in Japan will disrupt trade and investment between Asia and Japan in the short term, but our readers are still more worried about inflation, according to last week’s web poll.
Will Japan be able to deliver enough new iPads?
Will Japan be able to deliver enough new iPads?

Early last week, when we asked readers whether inflation or recession was the bigger threat right now, uncertainty surrounding the emergency in Japan stoked fears of wider regional effects.

Japan has deep economic ties to the rest of Asia in the form of trade, investment, tourism and official assistance, and it is still unclear how the disaster will affect those flows. Nomura, which has produced copious research during the crisis, said in a report on Friday that it does not expect to substantially revise its existing forecasts for Asian economic growth this year.

Some recessionary fears remain, but our readers’ outlook also improved during the week. In the end, two-thirds said inflation posed a bigger risk.

With Nomura predicting that the disaster will trim just 0.4% off Japan’s economic growth this year, the effect on imports will be small during the course of the full year, particularly as reconstruction spending kicks in. Malaysia, Singapore, Vietnam and Thailand are most dependent on exports to Japan.

The effect on exports out of Japan is less clear. The country plays an integral role in the global supply chain across a number of industries. In Taiwan, Japanese imports are equivalent to 12.1% of its economy, according to Nomura. Thailand and Singapore are similarly large recipients of Japanese goods and services.

To appreciate the gravity of the situation, consider that Apple’s latest gadget, the iPad 2, relies on a string of parts made in Japan, including the touch-screen overlay from Asahi Glass and the battery from Apple Japan. The biggest challenge is logistical — continued aftershocks, power outages, transport disruptions and employee absence all threaten the production and distribution capabilities of high-tech manufacturers.

And aftershocks are an immediate problem for semiconductor fabrication plants, where precision manufacturing processes have to be shut down during bigger tremors.

Foreign direct investment in Asia by Japanese companies might also slow down as domestic concerns consume resources, but this is expected to be temporary. Similarly, the overvalued yen should start to stabilise thanks to the G7’s agreement to intervene in the currency.

Nomura also says that Japanese lenders have strong balance sheets, so their loan books across the region will probably not be affected, and the same goes for the government’s overseas development assistance, which primarily benefits Vietnam, Indonesia and the Philippines.

Tourist arrivals in Asia, on the other hand, could stand to increase as visitors heading for the region steer clear of Japan, due to fears of nuclear contamination and general disruption to transportation and services.

That leaves inflation as Asia’s chief bogeyman. China Construction Bank last week raised its forecast for China’s consumer price index to 5% from 4.6%, but said that it expects inflation to ease from the third quarter as the government’s monetary tightening measures take effect.

Overall, 68% of our readers worried that inflation is the biggest threat facing the region, with the remaining 32% most concerned about the risk of a downturn. If the economists are right, both camps can relax. Time will tell.

¬ Haymarket Media Limited. All rights reserved.
Share our publication on social media
Share our publication on social media