Japan’s global economic impact 

Japan’s horror is still unfolding. The world’s attention remains stuck on the effort to reduce public danger from the Fukushima nuclear reactors. Against the backdrop of acute crisis, longer-term impacts are insignificant. But they are real — and they pose challenges to the West’s recovery from recession, even as they remind us how important a robust recovery is.

Japan’s calamity will disrupt “normal” supply and demand for the most basic stuff that the world needs, now and potentially for years to come. Consider the potential impact on food prices. The tsunami has damaged rice paddies and other agricultural resources.

Japan will have to make up for domestic shortfalls with imports, further straining an already-stretched global food supply. The disaster will similarly hit energy prices. The best-case scenario for the nuclear plants is that they do no further public harm — they are permanently destroyed.

Japan must replace this lost power generation, along with replacing the energy from disrupted gas lines, with energy imports. In the short term — which could be a matter of years — the nation will have no choice but to use some of that replacement energy inefficiently. For example, Japan could put temporary diesel-fueled electricity generators offshore. This demand will push global energy prices higher than they otherwise would be.

The global supply chain for goods and services will suffer too. Japan’s auto industry has halted domestic production this week. The nation also produces components for the iPhone and other products for China, which assembles them into the finished pieces.

With Japan’s top-notch export industry having suffered such a serious blow, some goods production might cease while other manufacturing might move, at least temporarily, to nations that do the “same” job less well and using more energy.

As the weeks and months pass, Japan will turn to rebuilding. This job will push up global demand for raw materials such as steel, cement and copper. Other nations struggling to invest limited resources in aging infrastructure, including the U.S., will have to compete with this demand.

Moreover, Japan’s surge in demand for construction materials could affect the quality of new infrastructure and buildings. Japan itself does not seem likely to allow for corner-cutting on building codes and materials inspections. Nations that aren’t so conscientious, though, or that want to do things on the cheap, will be stuck with what Japan doesn’t want.

Remember how the Gulf Coast’s surge in demand after Hurricane Katrina spurred American builders to import substandard drywall — drywall that homeowners must pay to rip out.

Then there is the cost of money itself — borrowed money. Japan, like America, does not run budget surpluses. Unlike America, though, it has been able to borrow from its own citizens, who save assiduously.

Japan’s rebuilding needs could overwhelm this domestic savings market, pushing the nation to borrow abroad. To do so, Japan might have to pay higher interest rates. Other indebted countries could have to raise their own rates to compete. In such a case, Americans would have to pay more on their credit card balances and for
new mortgages.

A saving grace of the human condition is that we search for hope among the ruins — and find it. In the recovery and rebuilding trial before it, Japan could serve as an inspiration to America and Western Europe, which have now struggled, often without focus, to recover from nearly a half-decade’s worth of self-inflicted financial and economic “crisis” (a real crisis puts that word into perspective).

Japan’s cataclysm has no silver lining. But even as we grieve, we should remember: Nations weakened by their own failure to deal decisively with their own problems — as America is right now — risk becoming less able to help another country that finds itself in terrible need.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal and the author of “After The Fall.”

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