This year has been a tough year for the world economy after the recession. It is getting into pitfalls after pitfalls, the dangers to oil producing regimes and now a 9.0 earthquake plus a 30-meter tsunami in Japan. Japan’s economy is among world’s top 5 big economies that is facing a bigger threat beyond the destruction caused by earthquake and Tsunami. The Japanese economy was already in trouble but now it is facing a mammoth task of reconstruction and rehabilitation. In order to cope with this task the Japanese government will have to pile billions of dollars of fresh borrowing on top of a debt load that is already one of the biggest in the world. Japan was struggling from last 2 decades after the collapse of a major financial bubble. Japan faced four recessions, with virtually flat lined growth, GDP rising less than 1 percent a year. There were already forecasts that Japanese economy will continue contracting in the next few quarters. On top of all these worries is a nightmare looming on Japan from last two decades and that is their aging or to rightly putting it declining population.
The disaster facing Japan has also impacted global markets. Within days nearly $247bn have been washed away by the tsunami caused by Japan’s crises from major European stock markets. The FTS Euro first 300 index of top European shares finished the day down 2.2 per cent. It closed at the lowest closing index of 1,084.70 points in three months. In the early trading after Japan earthquake and tsunami, Germany’s DAX index was down 3.19 per cent taking the hardest blow. France’s CAC-40 was down 2.51 per cent and London’s FTSE 100 index fell 1.38 per cent. Across the Atlantic, US markets recovered from the losses incurred during early part of the day after opening. Dow Jones industrial average and Standard & Poor’s 500 indexes both slid down by around 1 per cent. In Southeast Asia, markets took a direct blow with Singapore sliding more than 3 per cent at one stage, which was the lowest level since last August. Indonesian shares also fell 1.3 per cent. Hong Kong shares fell 2.86 per cent, Australian shares plunged 2.11 per cent, and South Korea stocks shed 2.40 per cent. Russian and South African stocks fell nearly two percent amid uncertainty.
There was a frenzy of selling by investors across Asia with heavy selling of risky assets such as equities and commodities. This was definitely fuelled by the uncertainty about world growth following the crises in the Arab world and later the Japanese natural disasters. The American dollar, a safe haven asset, rose by 0.8 percent against major currencies reversing the downward trend from last four months. Japanese yen also rose because of its capacity as a safe haven asset. To calm the markets and ease the monetary policy, the Bank of Japan fed a record $184bn into money markets. This timely step supported efforts to stabilize the currency market. This was also a pre-emptive measure to cope with the likely surge in demand for post-earthquake funds. . However, the downside to this is that Japan is building a mountain of bonds, a risky business if not managed actively. Especially in the case of Japan that has the world’s highest public debt burdens nearly twice its annual GDP, only second to Zimbabwe. In order to meet the domestic demand Japan will have to resort to issuing more bonds up to $200 billion roughly. If this is done then the Japanese government will have to pay higher interest rates to investors to maintain demand for all those new bonds.
This in turn will further affect the ability of the government to react to any future demands if they may arise. What many observers have overlooked is the massive loss of life and its affects on the prospects of Japan’s future economic recovery. Japan was already facing an increasingly aging population or more recently a declining population. This earthquake has brought the issue of population head on as well. As part of its reconstruction it might need to look at ways to sustain its population in a healthy balance. The issue of nuclear radiation will also measure heavily in the coming days for Japan and for the world in the broader context. With massive reconstruction efforts ahead, Japan has also decided to scrap the nuclear power stations at the centre of possible nuclear meltdown. Japan already experienced radiation issues after world war II, would have to rethink its nuclear strategy to meet its energy demands.
This article was published in ICE Business Times Bangladesh.