This post is a guest contribution by Rebecca Wilder, author of the of the News N Economics blog.

Forget the Eurozone for just a minute. Japan’s problems are big: Toyota is a major exporter/employer. Last year 48% of all new standard passenger vehicles sold in Japan were Toyotas (or its Lexus brand). The WSJ article describes Toyota’s status in Japan as the following:

In short, Toyota is to Japan what General Motors Corp., in its heyday, was to America. And for a beleaguered country that has suffered a series of institutional blows in recent months – the collapse of the long-ruling political party, the bankruptcy of its champion national airline, a renewed bout of deflation – the global humiliation of Toyota may be the most psychologically damaging blow of all.

Psychological blow, what about an explicit economic blow! Toyota is certain to drag the only Asian G7 economy down, since auto exports are big in aggregate export income.

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Japan’s single largest export category in December was, of course, manufacturing: 22% of total exports. And a huge 14% of the total value of exports in December came from motor vehicles (auto sales, that is – separate from parts).

The Japanese economy grew 1.14% in Q4 2009 with a huge 0.67% contribution from exports. The second major contributor was private consumption, which added 0.39%. Going forward, consumption and export contributions are likely to wane from the major Toyota recall campaign that is under way.

First the direct export channel will probably crumble as demand for Toyota cars derails. Second, there will be a lagged labor market effect. Sure, workers will be needed to address the recalls; but the loss in hours stemming from a drop in sales is likely to be much larger, and the net jobs effect negative.

Toyota is a major employer in Japan that currently has 320,808 employees and has already shuttered doors (at least temporarily) inother countries. It’s only a matter of time before the effect hits the home labor market.

This is big. I wouldn’t be surprised if the IMF downgraded its forecast of Japan based solely on Toyota’s misstep.

Source: Rebecca Wilder, News N Economics, February 22, 2010.

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