The March 11 earthquake in Japan, the 5th largest in world, has affected the world economy in more ways than just economics. So while looking at this major natural disaster the two criteria discussed in the article are Economics & Politics.
The Economics: A classic case of “supply side disruption” fueled by the unpredictable and dangerous cocktail of earthquake, tsunami and nuclear disaster. Japan is amongst the major producers of capital goods and creates 10% of the world economic output. The good exported by Japan, consisting mostly of machinery and transport equipment was in 2010 worth about $470bn. This natural disaster wrecked havoc on the factories producing the goods heavily demanded by the whole world. This was visible in major reduction in production & sales figures of auto majors sourcing from Japan. Their May 2011 sales figures declined nearly 23%. Japan provides nearly 60% of the world’s computer chips and the calamity resulted in closure of 2 companies for repairs reducing the output by 25%. The nations round the world hence need an early recovery for the smoothening of the supply chain and depreciation of Yen.
The fund flowed into the nation for the reconstruction and there was a high appreciation of Yen. The bond market in Japan was also gathering pace. This proved one major point – Investor confidence in Japan’s recovery and repayment capability. The Japanese showed this capability and capacity. They have restored the infrastructure destroyed with great speed. An example of this would be the case of the Tohoku Shinkansen, a high-speed rail line connecting Tokyo and northeastern Japan. It recommenced operations 49 days after the earthquake.
A stable growth in country’s production with stable government in Japan will be beneficial for the whole world. Stability at power is one of the major criteria which will change the credit rating of a nation (recent case being the USA). Japan has seen already seen 5 leaders change guard and the sixth was due, all within the span of 5 years. Moody’s for this purpose has downgraded the credit rating from AA3 to AA2. But investor sentiment does not shake much due to this downgrade. Japan has been a customer of lower rating for more than a decade, but yet its borrowing cost hasn’t increased much.
Nuclear Crisis: Even with the after effects of the Fukushima power plant, Japanese government is adamant at continuing with the Nuclear power plants while some of the European countries are planning a gradual shutdown. This is essential for few reasons. Firstly Japan does not have a very good supply of wind power or the solar power for generating consistent supply of electricity. Also with the harsh experience of the 1988’s Oil crisis and with aim of reducing the dependence of oil for power generation, only Nuclear power remains a credible source of energy. Secondly, with the continuing operations Japan will still be a part of group of countries promoting nuclear energy along with France, the USA, Korea and Russia. These countries are net exporters of nuclear software and hardware and rake in huge revenues from these. And the future of this source looks bright too. And here is the opportunity for India to pitch in. India can garner its relations with Japan for the supply of nuclear technology for both civilian and military needs. With huge electric power deficit faced by India and big future plans of energy sector development, it can leverage the requirement to get the required deals from Japan.
Another reason for Japan supporting the nuclear cause is because of its internal power equation. Only a minority of the Japanese citizens support the nuclear power cause while the majority still has the burns of the WW2 & Chernobyl engraved. To counter the anti-nuclear power sentiments, the power stations are built in states having low fiscal capabilities. These states are provided with higher subsidies. These subsidies increase the state’s dependency on the external funding and also allow the future expansion of the stations.
The Politics: The game changer in the political power scenario was the Japanese earthquake. Although not a pleasant occurrence, but it did provide China with an alternative to showcase it is ready to warm up its relation with Japan. This was essential to counter balance the Sino-Pakistan relations which have become an irritant in the world politics and increases the already heightened tensions between China and US. After the American raid in Abbottabad for Osama, any souring ties between the brothers’ in arms against terrorism give rise to speculation of deepening Sino-Pak relations. In fact Pakistan’s defense minister replied to the American withdrawal of military aid by saying “China will fill this gap”. This in effect suggests a deeper long lasting financing of Pakistan’s economy by Chinese funds. But this financing is not directly through funds for the economy, but on ground works. China has been building up the transportation system of Pakistan for China’s ambitious project of connecting Xinjiang with the Arabian Sea in a transport and energy corridor. China has also been active in the Arabian Sea by developing the Gwadar port of Pakistan and making it a Chinese naval base. So china needed to dispense with this image and helped Japan in rebuilding itself. But this was not a purely humanitarian work, but also to assess the Japanese internal military preparedness against any crisis situation (No country can get a free access unless a disaster strikes).
US, for the above reasons, wants’ to provide a faster counter balance for the Asian power struggle. “There are no free lunches”. US also wants the recovery for its internal benefit, jobs. Due to the credit crisis and associated job losses and the dependence of American industry on the high end produce of Japan, America will need a rejuvenated Japan as quickly as possible to keep the ball rolling.
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