Japan – Catastrophe And Aftermath

Natural disasters are, to say the least, destructive, often calamitous in proportion and tragic in consequences. These are unfortunate events that harm people, the environment and economies in one fell stroke. This precisely is what happened in Japan, which recently witnessed a massive earthquake of 8.9 on the Richter scale, followed by a devastating tsunami. Nearly 7,200 people have been confirmed dead and about 18,000 more are still missing. The number has been on the rise with each passing day. In the aftermath of this disaster nearly five lakh homeless people are struggling to stay warm in freezing temperatures with scant supplies of food and fuel. On the environmental front, the island has shifted by a few inches. The Japanese, who are used to earthquakes, would quite possibly have managed to tackle this tsunami too. However, not even in their worst nightmares could they have thought of the radioactive scare due to the damage to their nuclear power plant, the impact of which may be felt for years to come.

As mentioned earlier, this series of devastating events has had an adverse impact on the people, the environment and, yes, the economies. Apart from the huge losses on the infra-structure front, this export-oriented country, which is highly dependent on nuclear power generation, has almost come to a standstill, thus suffering on the economic front as well. In a globalised arena wherein economies are connected and are dependent on each other, any disruption in one corner of the world has an inevitable impact on the global economy. Furthermore, Japan being the third largest economy (USD 5.391 trillion) in the world after the US and China, the investor fraternity was all the more concerned about the impact this catastrophe would have on the global economic front. This was clearly reflected in the performance of the stock markets all over the world.

So what does this portend for the Indian economy, our markets and investors? We are of the opinion that the damage to the Japanese economy is massive and worse still is the loss of human lives. However, so far as the economic fallout is concerned vis-à-vis other larger economies, it is unlikely to be severe on the Indian economy. The basic factor is that the bilateral trade between India and Japan is only around USD 10 billion. Besides, Japan is an export-driven economy (total exports USD 735.80 billion) and, therefore, this could shock the supply side and not the demand side. The next most important question to ask is: how much do we import from Japan? Imports from Japan account for only two per cent of our total imports. We do not even appear in the list of the top five importers from Japan.  So the disruption in manufacturing is hardly expected to have an adverse impact on the Indian economy. But, yes, on a micro basis there are certain companies that may get affected. For instance, Maruti Suzuki imports about 25 per cent of its parts from Japan and any prolonged disruption in the supply chain will have an impact on the performance of the company, though the management has not yet announced any such disruption. However, a disruption, if it does occur, may turn out to be an opportunity for other passenger vehicle manufacturers.

As mentioned earlier, this disaster could affect the supply side, thus opening up opportunities for other economies. Japan exports about USD 44.11 billion worth of steel, which is about 7.50 per cent of global exports. So exports from Japan will be temporarily hit and may push up the price of iron and steel in the international markets, helping the Indian steel manufacturers to get the benefit of higher realisation. Further, once the reconstruction activity begins in Japan there will be a greater demand, creating greater opportunities. But the rise in steel prices will result in higher raw material prices for automobile manufacturers, real estate companies and capital good manufacturers.[PAGE BREAK]

One indirect impact is that on the currency front. The Japanese yen has appreciated in anticipation of the cap-ital outflow from different markets. There are high expectations about repatriation of Japanese investments from other markets. But this will have a greater impact on Japanese exporters and not the Indian economy as our imports from Japan are low But again, on a micro level Maruti Suzuki is likely to feel the impact as it imports 25 per cent of its parts from Japan and has not hedged itself against the yen.

Thus, if we consider the overall impact on the Indian economy, it is expected to be minimal. Rather the disaster in Japan might create more opportunities for the Indian markets in the long term when rebuilding starts in Japan. If considered in isolation, on the macro level the impact of the Japanese disaster is expected to be minimal. Japan has a great history to bounce back from such calamities. We expect a similar bounce back now too and when the rebuilding starts there are going to be a lot of opportunities for India.