Today at TILE we talked about the devastating earthquake and tsunami that hit Japan last Friday. Appropriately, everyone is focusing their attention on saving lives, containing nuclear radiation from damaged reactors, and doing everything they can to help. But after the initial rubble is cleared, what are the potential aftershocks to the Japanese economy? Will more than just buildings and towns need to be rebuilt? How can we help from so far away?
Japan’s economy is the third largest in the world (according to its Gross Domestic Product, which basically tells you the total amount an economy produces). As a size comparison, the U.S. is first, followed by China in second, and India in fourth. The good news is that, unlike the recent earthquake in Haiti and catastrophic 2004 tsunami in Indonesia, Japan has the financial resources to rebuild. Plus, in contrast to many earthquake-prone nations, most buildings in Japan were designed to withstand a shaky foundation (although we aren’t sure anyone can plan for the most powerful earthquake ever recorded). But infrastructure isn’t the only thing that can be damaged by a disaster.
The Japanese government has already “pumped money” into the economy – encouraging continued spending to keep the economy going. The Bank of Tokyo has said that it will help support Japan’s currency – the yen – effectively showing the world’s investors that it will do everything necessary to maintain Japan’s standing on the world stage and the value of its currency. Japan is moving fast to head off additional problems, partnering with the private sector (General Electric) to help manage the risk of a nuclear meltdown. It is doing the right things – prioritizing its citizens’ safety and sending a message that it plans to stay in business. Think about achieving first chair in the school band or starting quarterback for the football team. If you suddenly came down with a really bad flu, wouldn’t you be telling your coach, teammates, and friends that you’ll soon be back and stronger than ever?
On the other hand, every day that Japan is in limbo means less output and less earnings in the future. Shutting down nuclear energy plants means there is not enough energy to go around, so the power company is cutting the power supply to cities on a rotational basis (this certainly means less computer time every day). Toyota announced it was shutting down factories for most of this week (which means fewer cars to sell in the future). Concerns about less production, or output, has sent the Tokyo stock market down more than 8% in the past few days. As we’ve talked about in the past, expectations of future earnings is a big reason why stocks go up or down. Low stock prices are sending a “bearish” or downbeat signal about what’s ahead.
Of greatest concern right now is the challenge with Japan’s nuclear energy plants. Not only is there a need to cool the overheating rods and make sure people are safe, but there is also a need to think ahead. How will Japan fuel its economy if it has to rely on alternative sources of energy? Will other nations consider moving away from nuclear energy too? If so, what does that mean for the availability and cost of alternative sources?
What does this mean for the TILE community? What you see in the newspaper has real implications long term – and the inter-connectedness/ domino theory means the tragedy will come right back to you at home (think higher prices to fill your tank or charge your iPod). Do you have energy stocks or bonds in your portfolio? How will those companies be impacted by this disaster? Most likely they aren’t immune to some kind of repercussion, whether positive or negative. Do you have any friends in Japan? Our friends at DoSomething.org have come up with a creative way for young Americans to show their care and support for the people of Japan through “Paper Cranes for Japan.” Check out their Facebook page and consider making a connection. Long term, it may have implications as far away as Japan or as close as right next door.
- Amy