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Global Economy Keeps Wary Eye on Japan Global Economy Keeps Wary Eye on Japan

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Economy

Global Economy Keeps Wary Eye on Japan

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Yoshikazu Tsuno/AFP/Getty Images

Not until the end of his seven-minute remarks on Japan Thursday afternoon did President Obama mention the economic aftershocks of the tragedy, and even then, only tangentially: "In the midst of economic recovery and global upheaval,” Obama said, “disasters like this remind us of the common humanity that we share."

It would be a mistake to assume, though, that Obama and his advisers are unconcerned with the potential harm that could spill into the U.S. and global economies from last week’s massive Japanese earthquake and its aftermath. Far from it. The administration, along with financial markets and leaders of the world’s largest economies, is watching closely for signs of a drag on the global recovery, including the effects of a possible Japanese recession.

 

Potential trouble spots include disruption to global supply chains, psychological tolls on markets, and the sudden strengthening of the yen, which will hinder Japanese exports and, in the event of a corresponding crash in the future, could throw a wrench at multinational banks with holdings in Japan.

After a conference call on Thursday night, G-7 finance ministers said in a written statement that they would join with Japan to act to stabilize the yen.

"We express our solidarity with the Japanese people in these difficult times, our readiness to provide any needed cooperation, and our confidence in the resilience of the Japanese economy and financial sector," the statement read.

 

"In response to recent movements in the exchange rate of the yen associated with the tragic events in Japan, and at the request of the Japanese authorities, the authorities of the United States, the United Kingdom, Canada, and the European Central Bank will join with Japan, on March 18, 2011, in concerted intervention in exchange markets. As we have long stated, excess volatility and disorderly movements in exchange rates have adverse implications for economic and financial stability. We will monitor exchange markets closely and will cooperate as appropriate."

Markets have fluctuated on news from Japan over the last week, and economists say a full-scale meltdown at the Fukushima Daiichi nuclear plant could shake the foundations of global economic confidence.

Still, most economic analysts continue to predict that any effects on the United States will be modest – because, though Japan remains the world’s third-largest economy, trade with Japan accounts for only a tiny fraction of the U.S. economy.

“Japan is also likely to have a sharp snapback in activity once power is restored, calm returns, and rebuilding gets under way,” Joshua Feinman, chief global economist for DB Advisors, wrote in an email to NJ on Thursday, adding:  “The impact of all this on the US is apt to be quite modest (because) Japan's economy is simply not that integrated with the U.S.”

 

Analysts at Barclay’s Capital estimated on Thursday that the crisis will cost Japan between 2.4 and 3.4 percent of gross domestic product, bringing Japanese growth under 1 percent in the next three months. Economists at PNC said “the net impact of a weaker Japan and a weaker global economy will likely be a moderate downshift to previously strong global GDP growth for 2011.”

White House officials stress that the Japanese situation remains fluid and fast-moving, both on the ground and in markets, but they caution that the last major Japanese earthquake, in 1995, had little lasting impact on the world economy.

Treasury Department officials downplayed – but did not dismiss – questions about whether the disaster could deal a psychological blow to the U.S. recovery, by dampening consumer optimism.

"The fundamentals of growth in consumer spending are probably more important than consumer sentiment,” John Bellows, Treasury’s acting assistant secretary for economic policy, said in a phone interview, “although we are continuing to monitor sentiment."

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