Hong Kong: Japan’s natural and nuclear disasters could worsen an inflation problem already looming over Asia’s fast-growing economies.
Supply chain disruptions and increased Japanese demand for imported raw materials and untainted food are likely to boost price pressures in a region that, like much of the world, is already coping with rising prices for energy, food and other commodities.
The inflation situation was underscored on Friday when South Korea reported its consumer prices rose 4.7% from the year earlier, faster than the 4.5% rate in February. That was the fastest increase in 29 months and kept the inflation rate above the top end of the Bank of Korea’s 2-4% inflation target for the third month in a row.
Emerging Asian countries are particularly vulnerable because of their strong trade links with Japan and booming local economies already struggling to tame prices.
Prices of DRAM (dynamic random-access memory) microchips used in mobile phones, laptops and other electronic devices have risen about 8% since the 11 March earthquake and tsunami on fears of supply concerns, according to DRAMeXchange, Asia’s biggest spot market for memory chips.
Liquefied natural gas prices have increased between 10% and 20% in markets in Europe and Asia, as traders speculate that Japan will use it to replace nuclear power for its electricity generation needs. Lumber company stocks in Malaysia have benefited from investor bets that wood prices will rise as Japan rebuilds.
“Periods of disruption or stress to the Asian supply chain have always been inflationary,” says Glenn Maguire, Asia-Pacific chief economist for Société Générale in Hong Kong.
Maguire analysed supply disruptions over the past couple of decades—including the SARS (severe acute respiratory syndrome) outbreak in 2003 and the technology supply bottleneck in preparation for the Y2K calendar turnover in 2000—and found they invariably led to higher prices for both consumers and producers.
Even before the Japanese quake, prices in fast-growing parts of the region were rising. That has prompted central bankers across the region to lift interest rates to fight inflation. In the latest such move, Taiwan’s central bank on Thursday raised its benchmark interest rates by 0.125 percentage point, its fourth consecutive increase. India and the Philippines have also tightened monetary policy since the earthquake, and officials in Thailand and Malaysia have made noises that they intend to do the same at coming policy meetings.
Thailand’s President Abhisit Vejjajiva on Monday said rising prices remain his country’s key challenge. “We’re working with the Bank of Thailand to ensure that our competitiveness is not inflated away,” he said.
China, the region’s largest economy, has indicated the crisis in Japan won’t deter it from its inflation-fighting campaign. Consumer prices there were up 4.9% from the year earlier in both January and February—above the government’s 4% target.
The Japan situation and higher oil prices, however, could also end up depressing global demand, taking the pressure off commodity prices and inflation generally. That scenario creates added uncertainty for central bankers in deciding how aggressively to raise interest rates.
Food prices are particularly susceptible to increased Japanese demand. The tsunami and radiation exposure are expected to knock out some of Japan’s agricultural production, which will have to be replaced either through higher production elsewhere in the country or by importing food from abroad. Japan already relies on imports for 59% of its food in terms of calorific value, according to its ministry of agriculture, forestry and fisheries, including nearly all of its wheat and beans, and 44% of its meat. Food exports—which represent a tiny 0.6% of Japan’s total exports—are mostly specialty items such as fruit and seafood.
Japan’s worst-hit areas account for nearly 20% of the country’s rice cultivation. And nuclear leaks into the ocean could boost Japan’s need to import seafood from other parts of Asia. It already imports nearly 40% of its seafood.
Significantly higher Japanese demand for imported food would add “to a powerful food inflation dynamic that is already under way”, says Société Générale’s Maguire.
Further reports of how the Japan situation affected the region’s economy were later on Friday, when Thailand and Indonesia report key economic data.
That government officials in the Asia-Pacific region remain primarily concerned about inflation underscores the assessment that Japan’s disaster isn’t likely to dent growth substantially. Taiwan’s government on Wednesday estimated the Japan crisis will shave 0.2 percentage point off its growth forecast for 2011, to 4.81%.
Australia’s treasury estimated this week that the effect on Australia’s growth in the medium term would be negligible. “Higher Japanese demand is likely to support world prices” for some commodities, including iron ore and coal, the treasury said. Australia’s economy has boomed in recent years on commodity demand, prompting its central bank to repeatedly lift increase rates to prevent price inflation.
Bank of Korea governor Kim Choong-soo said this week that “any impacts from Japan’s earthquake and financial troubles in the euro zone are indirect and not as big as that of oil prices”.
In-Soo Nam contributed to this story.
—The Wall Street Journal