Dire prospect for the post-quake Japan

I have had a tough time for a while. It's not the earthquake per se, though it has a major impact upon everything around me. I was or have been sick, which has nothing to do with the quake. It was difficult to continue blogging. That's it.

By the way, there are many stupid reactions on radiation in the world. For example, the news headlines, especially those of overseas media, tend to focus on radiation threat from damaged Fukushima nuclear power plants. I watched news on MSNBC, and a newscaster was hysterically yelling the concern of possible spread of radiation to the US. Google on Japan's news, and you'll find only those on radiation. Huh? It is so exaggerated that I lost any interests in watching. It's just absurd.

Foreigners, rushing to exit from Japan for fear of radiation, are quite laughable. I heard a news on a Californian jogging with a mask to keep from radiation. It's absolutely silly. Local Fukushima people have been proved not to be exposed to too much radiation to be harmful to health. Why should a Californian prepare for radiation when those living in a place 5500 miles away have no health problems?

I also found it funny to see China's salt panic. It looks like that Chinese food is contaminated more by their wastes than radiation from Japan.

The world should be relaxed and calm down.

Anyway, let's see what effects the quake has on Japan's economy.

Three major regions devastated by the quake, Iwate, Miyagi, and Fukushima, account for only 4% of Japan's GDP. So, it might appear to have little mark on overall economic activity. But there is a problem: Fukushima nuclear power plants, which are situated in Fukushima but operated by Tokyo Electric Power Company or TEPCO, supply electricity not to Fukushima or other devastated regions but to Tokyo and its surrounding areas, which account for 40% of GDP.

Fukushima nuclear power plants have generated about 20% of total electricity by TEPCO. What happens to the economy when those plants don't work?

Due to the power shortage, TEPCO has imposed rolling blackouts (or planned blackouts) in the Kanto district, which includes Tokyo and the other metropolitan cities. TEPCO is now desperate to gather any power to fill the demand-supply gap even by reactivating outdated thermal power plants and buying electricity from a steel company.

Despite of that, though, the probability has been increasing that even though the current rolling blackouts are supposed to end till April, there will be a huge demand-supply gap in electricity this summer. The Ministry of Economy, Trade and Industry (the former MITI), has estimated that one-fourth of demand won't be met.

Some companies like Toyota, Sony, or Toshiba have no choices but to halt a part of production plants due to severe damage by the earthquake. TEPCO's rolling blackouts also make any businesses harder to do in the Kanto district. Tohoku Electric Power Company, which provides energy to the quake-hit area, is also planning to impose the power cuts in their district, though having not done it so far because demand is still low in the region.

The power shortage may spread to the other regions. In fact, Kyushu Electric Power Company has decided to postpone the operation of two nuclear power plants now under suspension, which makes it possible to set out blackouts in the Kyushu region this summer. Hokuriku Electric Power Company is also reported to delay reopening two nuclear plants.

Electricity consumption is positively correlated to production. So, it's inevitable that production falls if electricity is cut.

How much production would be lost if the current power shortages keep on, say, until the end of this year? The coefficient of correlation between electricity consumption and GDP is 0.98, so I assume that there is a one-to-one relation between the two. Given Fukushima creates 20% of total electricity by TEPCO, and the Kanto area, where TEPCO operates, accounts for 40% of Japan's GDP, production might decrease 8% (=0.2 times 0.4) if there is no alternative to Fukushima's energy.

This figure could be worse if the other areas like Kyushu start planned blackouts.

This would cast a really dark shadow over the course of Japan's economy given that its debt has already surpassed 200% of GDP.

That's why I couldn't be optimistic on the country's economy.

The Rise and (Everlasting?) Fall of Japan's Manufacturing

An interesting statistics has just been released by the JEITA(Japan Electronics and Information Technology Industries Association), whose objective is, according to them, "to promote the healthy manufacturing, international trade and consumption of electronics products and components in order to contribute to the overall development of the electronics and information technology (IT) industries, and thereby further Japan's economic development and cultural prosperity".

Don't understand? In essence, it's a group of Japan's electronics firms like Sony, Panasonic, or Toshiba.

What's interesting here is that Japan's imports of high-tech consumer products are, according to JEITA's latest release, supposed to exceed its exports last year, the first time since the statistics began in 2000.

This kind of story like "Japan is losing in manufacturing" isn't new unfortunately, but the current report looks like more revealing in the sense that the country has had to respond to domestic demand of its thought-to-be-dominant staples by import.

Some may think of this phenomenon as tentative, taking into account that the demand for TV rose sharply last year due to the government subsidies. Companies are in a rush to transfer their factories into other countries, especially Asia, to cut costs and circumvent rising yen, so the rise of imports seems inevitable.

In fact, looking at the component of consumer electronics, the trade balance of video equipments including TV declined precipitously in 2010, while audio equipments like radio have kept in favor of import since 2001. It's the government policy, not the country's competitive edge, some may think so.

"Made in Japan" products are, however, going to be much scarcer in the markets. Look at the other electrical products. According to the JEMA, another electrical industry group, the imports of home electrical appliance has surpassed exports since 2001. So, refrigerators, hair dryers, or microwaves that you find in Japan are likely to originate in the other countries, even if the company's brand is Hitachi or Panasonic.

Some Chinese come to Japan for "Made in Japan" products, which they think are superior to "Made in China" in quality. It generally ends up buying more Chinese products, though.

Can companies benefit from offshoring production? I don't think so. Japanese firms have already lost the share of their once-dominant products like semiconductor or LCD panel to their Asian competitors. Given shrinking domestic markets, they are in a hurry to switch into "overseas production, overseas sale", but up until now nothing has emerged to stop the tide of losing battle in the markets.

Basically, it's doubtful to succeed in the business in low-income countries by high-income countries. Products made in or by high-income countries should be costlier than those made in or by low-income countries. Can consumers in low-income countries afford to buy those expensive products? Some may buy it, but sales are supposed to be disappointing given the thin layer of the high-income class in low-income countries.

Japan is fighting in an unfavorable ground.

Hard Time for New Zealand

It would be very hard to see how New Zealand's economy goes after the terrible earthquake that hit the country last month. At least for now, nearly 150 people died, and 200 people are still missing. Though the 6.3 magnitude is lower than the previous 7.1 in September 2010, the current earthquake has claimed more death tolls so far.

Nonetheless, the New Zealand's markets have relatively been calm. For instance, the benchmark stock index NZX 50 lost 1.5% to a twenty-day low just after the earthquake. It looks like that the disaster pulled the trigger of outpouring from the stock market, but it's mostly due to the concerns on the Middle East, the same as the other major indexes like S&P500 or Nikkei 225, rather than the earthquake itself.

Moreover, the bond market, the benchmark of "flight to safety", didn't budge even amid the turmoil. The yields of New Zealand's 10-yr government bond lowered on weekends somewhat, but it's, as is the same with the stock market, because of the Middle East.

The foreign exchange market, on the contrary, showed a different picture from the other two. The New Zealand dollar declined to a two-month low of 74.57 US cents last week, according to the Reserve Bank of New Zealand. The fund escaped the country for fear of a terrible shock, though it returned a little bit after Standard & Poor's confirmed that the nation's ratings aren't "immediately affected" by the earthquake.

One of the key elements for New Zealand's growth is government expenditure. The country's budget deficit relative to GDP is still below the OECD average. So, the government can afford to underpin the economy through budget expansion, especially for reconstruction, in the aftermath of the devastating earthquake.

The country would also have to rely on external demand to shore up the economy, given that it's uncertain how private demand, especially household consumption, rebounds after two consecutive shocks: Lehman and earthquake. New Zealand's exports have a nearly 30% share in GDP. That share isn't high compared to export machine countries like Germany or China, but it's still bigger than the UK or Australia.

The merchandise terms of trade rose to a 35-yr high last quarter. This environment would bode well for the country's exports.