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| World Bank Says Japan Quake Rebuilding May Take Five Years |
| World Bank, 21.03.2011 |
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| By Shamim Adam
(Updates with comment from Japan’s finance official in 10th paragraph.)
March 21 (Bloomberg) -- The World Bank said it may take five years for Japan to rebuild after this month’s earthquake and tsunami, which killed at least 8,450 and destroyed thousands of buildings.
“If history is any guide, real gross domestic product growth will be negatively affected through mid-2011,” the Washington-based lender’s staff said in a report today. “Growth should though pick up in subsequent quarters as reconstruction efforts, which could last five years, accelerate.”
Japanese Prime Minister Naoto Kan’s government plans to compile a supplementary budget to pay for reconstruction, which the finance minister said is unlikely to be unveiled by month- end. The central bank last week injected record one-day liquidity to maintain stability in the nation’s money markets, and authorities also led coordinated sales of yen with Group of Seven counterparts on March 18.
World Bank staff cited private estimates for the damage wrought that range from $122 billion to $235 billion. The damper on the economy will have a “modest short-term impact on the region,” with trade and investment flows disrupted, according to the report. The automotive and electronics industries are likely to be most affected, it added.
Bond Yields
The World Bank said that the 1995 Kobe earthquake and its aftermath may help gauge events following the March 11 magnitude-9 temblor and the ensuing tsunami. Liquidity injections by the Bank of Japan and appreciation in the yen, as traders abandon the so-called carry trade amid speculation overseas funds will be repatriated for reconstruction, are “combining to create downward pressure on bond yields,” according to the report.
The carry trade refers to investors borrowing in yen and shifting the funds into higher-yielding currencies. Japan’s benchmark government bond yields are the world’s lowest.
The yen appreciated to 76.36 per dollar on March 17, surpassing its post-World War II peak of 79.75 reached in April 1995. Yields on benchmark 10-year bonds touched a two-month low last week as the central bank said it will buy more government debt to lower borrowing costs.
“A temporary growth slowdown in Japan will have a modest short-term impact on the region,” according to the World Bank report. “Disruption to production networks, especially in automotive and electronics industries, could continue to pose problems. At this stage, it is unclear how the disaster will affect Japanese outward foreign direct investment, but it may dent the pace of overseas investment as the country’s focus turns inward on reconstruction.”
Global Impact
The impact of Japan’s strongest earthquake on record may hurt global economic growth, Singapore’s Finance Minister Tharman Shanmugaratnam said in the city-state today.
Japan’s financial systems are functioning without disruption and the impact of this month’s earthquake may not be as big as imagined, Naoko Ishii, the country’s deputy vice minister of finance for international affairs, said in a conference in Singapore today. Japan is “deeply committed” to its international financing programs, she said.
“The actual damage to the actual economic activities in the region is severe,” Ishii said. “When it comes to the overall economic impact of Japan, however, it may not be as large as we imagined. GDP share of the three most-affected regions is 4 percent of the Japanese total GDP and that region is not necessarily sitting in the industrial heartland.”
Fragile Sentiment
Police said more than 8,400 people died and about 13,000 are still missing after the disaster, which triggered a nuclear crisis in Japan.
Reconstruction activities will offset the effects of the March 11 temblor, Ishii said. Business and consumer sentiment is understandably fragile, as the threat of radiation leak from a damaged nuclear plant could affect the way of life, she said.
“Private insurers are likely to bear a relatively small portion of the cost, leaving a substantial part to be borne by households and the government,” World Bank staff said in the report. The cost to the insurers range from $14 billion to $33 billion, they said, citing an estimate by AIR World.
A power shortage after the quake forced companies such as Sony Corp. and Toyota Motor Corp. to halt production. South Korean firms are facing higher prices for memory chips, in part because Japan accounts for up to 36 percent of global production and that production is now disrupted, while Thai exporters of cars report that current supplies of components imported from Japan will last through April, the World Bank said.
Debt Costs
A rising yen may increase debt-servicing costs for East Asian nations, the lender said in the report, adding that about one-quarter of developing East Asia’s long-term debt is denominated in the Japanese currency, ranging from about 8 percent in China to about 60 percent in Thailand.
“A one percent appreciation in the Japanese yen translates into a $250 million increase in annual debt servicing on yen- denominated liabilities held by East Asia’s developing countries,” the lender said.
Developing East Asia, which excludes Japan, Hong Kong, Taiwan, South Korea, Singapore and India, will expand 8.2 percent this year, World Bank staff said in the semiannual East Asia and Pacific Economic Update report today. The region grew 9.6 percent in 2010, it estimated.
Policy makers across the East Asian region need to tighten monetary policy to keep inflation expectations from escalating, according to the report. Governments should also let their discretionary fiscal stimulus packages lapse, it said.
Monetary Policy
Asian central banks from China to Thailand and South Korea have raised interest rates this year as a jump in crude oil prices escalates the danger of inflation in a region that’s led the global economic rebound. Policy makers are juggling containing inflation and protecting growth as higher energy prices reduce consumers’ purchasing power and increase the costs of doing business.
“Evidence that price shocks are not temporary is now plentiful,” the World Bank staff said in the report. “Inflation has become the key short-run challenge for the authorities in the region, complicated by a surge in portfolio capital inflows and rapidly increasing food and commodity prices. Price shocks are affecting core inflation that could trigger a wage-price spiral.”
Some Asian currencies and stock markets have surged in the past year as the U.S. Federal Reserve’s quantitative easing helped spur investments into the region’s assets, forcing policy makers to battle capital flows that risk creating asset bubbles.
“Currency appreciation -- especially with the pause since late 2010 -- has not hampered the recovery, although exporters’ margins have been affected,” the World Bank said. “Exchange market intervention has limited the extent to which nominal exchange rates across the region have strengthened, but that has been largely offset by higher inflation.”
--With assistance from Cherian Thomas in Bangalore, Chris Anstey in Tokyo, Sunil Jagtiani in Singapore, Brendan Murray in Sydney. Editors: Stephanie Phang, Paul Panckhurst
To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net
To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net
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