March 14, 2011
While it is still early to assess the full impact of Japan’s earthquake and Tsunami, some aspects are getting clearer. Aside from the heart-breaking human tragedy and un-nerving nuclear picture, the immediate impact will most likely be in the global supply chain for a host of products.
Factory shut-downs across different industries in Japan will result in shortages in products and components, which will have a multiplier effect worldwide. We are seeing a negative impact on the global crude oil markets as a result of the refinery and utility shut-downs. But this is most likely a temporary impact, as Japan may need to replace its nuclear consumption with fossil fuels. br />
The nuclear question is the much bigger impact, longer term. This disaster has shed an unflattering light on the nuclear industry, most likely dealing it a severe blow for a long time. A number of nations will question the suitability of nuclear energy as a key component of the energy mix.
This tragedy came at a particularly bad time for the Japanese economy. The multi-year economic slump had left the Japanese in a very weak fiscal situation, which will get only worse as they gear up to fund the rebuilding and reconstruction effort. The Bank of Japan injected heavy liquidity in the market this morning to keep the economy functioning normally.
It is expected that Japan’s funding needs may cause an appreciation in the value of its currency, further straining its export-centric economy. And since Japan is a major holder of U.S. Treasury bonds, the need for funds repatriation may have an impact on U.S. interest rates as well.
The confidence of U.S. investors was shaken ahead of this tragedy by the unrest in the Midddle East and its impact on global oil prices. The re-emergence of Europe’s sovereign debt problems and concerns about China’s growth prospects only add to this unsettling global backdrop.
While all of these events are important, it will be developments on the domestic front that will be critical to the U.S. economic outlook. The domestic economic recovery has been on steady ground and will get more strengthened should the labor market continue to recover.
Sheraz Mian
Director of Research
Zacks Investment Research
