World braces for Japan economic hit

TOKYO Japan’s devastating
earthquake and deepening nuclear crisis could result in losses of up to $200
billion for the world’s third largest economy but the global impact remains
hard to gauge five days after a massive tsunami battered the northeast coast.

The disaster is expected to hit
Japanese output sharply over the coming months, but economists warned it could
result in a deeper slowdown if power shortages prove significant and prolonged,
delaying or even scotching the “v-shaped” recovery that followed the
1995 Kobe earthquake.

Most believe the direct economic
hit will total between $125-$200 billion, resulting in a contraction in second
quarter gross domestic product (GDP) but a sharp rebound in the latter half of
2011 as reconstruction investment boosts growth.

“The economic cost of the
disaster will be large,” economists at JP Morgan said. “There has
been substantial loss to economic resources, and economic activity will be
impeded by infrastructure damages (like power outages) in the weeks or months

High-yield bonds and U.S.
Treasuries top the list of vulnerable assets should the triple disaster of earthquake,
tsunami and nuclear breakdown prompt Japanese investors to bring overseas funds
back home, analysts say.

Although the damage to
infrastructure has been severe, some of the biggest risks to the economy may
come from indirect market consequences of the disaster, such as a rise in the
Japanese yen.

The yen surged to an all-time high
against the dollar after the Kobe earthquake in 1995 as Japanese firms pulled
funds home.

The dollar has fallen 3 per cent
against the yen since the disaster and is now close to the low hit after Kobe.