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Japan: the stir after the shake

Japan: the stir after the shake
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First Published: Wed, Mar 16 2011. 09 06 PM IST
Updated: Wed, Mar 16 2011. 09 06 PM IST
The combined impact of the earthquake off Japan, the resulting tsunami, and now the fears of a meltdown in one of Japan’s nuclear plants has led to a sharp sell-off in asset markets. Stocks, gold, oil and commodity markets have all been pummelled. Are markets overreacting, or does the Japanese catastrophe threaten to be the last straw on the back of a fragile global recovery, already burdened by the revolts in the oil-producing countries in the Arab world?
Much depends, of course, on how the nuclear disaster at the Fukushima plant plays out. A string of bad news on that front has kept everybody on tenterhooks. It’s worth remembering that Fukushima is still regarded as a category 4 accident on a scale of zero to 7, so comparisons with Chernobyl, a category 7 accident, look unnecessarily alarmist. Nevertheless, the reaction of the Japanese stock market has been much more brutal than after the 1995 Kobe earthquake.
Assuming that the radiation threat is contained, the most plausible scenario is an initial contraction of the Japanese economy, followed by a rebound as rebuilding gets under way. The sharp falls in the commodity markets are based on the contraction in Japanese demand, but part of the reason is also the reaction of speculative funds fleeing the sector. The initial knee-jerk reaction has seen hot money shifting to safe havens such as the Swiss franc and to US treasuries.
What about the longer term? The US Federal Reserve believes the recovery is on a firmer footing. Data for February from the purchasing managers’ indices seem to suggest the same: They show that the global economy expanded at its fastest pace since April 2006. Globally, both manufacturing and services are showing good growth. The composite leading indicators of OECD point to continuing expansion in most developed countries. True, one of the questions is whether the expansion in the US will continue even after the withdrawal of monetary stimulus later this year. But at the moment, economic activity is robust. These conditions are unlikely to be significantly altered by the fallout from Japan. In fact, the reduced crude oil prices work in favour of countries that import their requirements, such as India or the US.
The longer-term concern, however, is whether the nuclear disaster in Japan sparks a move away from nuclear energy, which could lead to a dramatic rise in demand for oil and in oil prices. While a reassessment of safety in nuclear plants is called for, it would be unfortunate if a one-off nuclear accident resulting from an earthquake in a well-known seismic zone and a tsunami should put off the construction of nuclear plants in an energy-hungry global economy.
What effect will Japan’s crisis have on the world? Tell us at views@livemint.com
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First Published: Wed, Mar 16 2011. 09 06 PM IST
More Topics: Ourviews | Japan | Kobe | Earthquake | Tsunami |