Japan Headwind to Hit Asian Economies

PATRICK BARTA BRIAN SPEGELE

Disruptions to Japan's economy in the aftermath of last week's earthquake and tsunami are expected to ripple across Asia in the coming weeks, further muddling the region's economic picture at a time when countries are already struggling with higher oil and food prices.

Asia overall is still expected to post vigorous growth this year, with estimates of gross domestic product of 7.5% to 8% excluding Japan. But economists were already predicting growth would slow from last year, when regional GDP surpassed 9% in a rebound from the global financial crisis, with central banks hiking interest rates and consumers starting to rein in spending to combat higher inflation.

Japan's disaster adds another set of uncertainties, at least in the short run. Friday's quake decimated vital infrastructure in parts of Japan and may leave many factories without reliable power supplies for weeks to come, jeopardizing supply chains for some of Asia's biggest exporters. Steel, paper and consumer-electronics plants were among those closed Monday.

"Ports are closed and deliveries are affected, especially in the electrical industry—containers are stuck in the ports," said Fu Wing Hoong, president of the Electrical and Electronics Association of Malaysia, which is a major producer of electronics components including some that rely on parts made in Japan. "Any disruption in the electronics sector in Japan will definitely have an impact," he said.

Economists said the good news was that heavy spending on reconstruction projects would eventually help restore Japan's economy, which in turn could result in a surge of demand for some Asian products such as wood and other commodities. But any rebound isn't expected to come until the latter part of the year, with a sharp slowdown—or possibly even a contraction—expected in the next quarter or two.

Trade between Japan and other Asian countries may fall sharply in the short run, said Tim Condon, an Asia economist at ING in Singapore. Combined with other problems such as high inflation, that means "the next round of revisions to growth in Asia will be down," he said.

Japan remains a critical part of the regional economy despite recently losing its place as the world's second-largest economy after the U.S. to China. It is the biggest source of foreign direct investment for some parts of Asia and a key generator of tourist revenue, especially for countries like Thailand, which receives an estimated one million Japanese visitors a year. It's a major source of remittance revenue for places like the Philippines, which has more than 200,000 of its citizens working in Japan, including thousands in the hardest-hit areas.

Japan is also one of the region's most critical trade partners, buying up much of the iron ore, coal, natural gas and other commodities produced in Indonesia, Australia and elsewhere and accounting for about 10% of the region's exports overall, according to ING's Mr. Condon.

In a report to clients, JP Morgan argued the earthquake "added to the unusual array of shocks that are buffeting the global economy in early 2011," including higher oil and food prices and severe winter weather in the U.S. and Europe. The bank lowered its U.S. growth forecast for the first half of the year Friday for the second time in two weeks and said it is likely to make further downgrades "elsewhere around the globe in coming days," though it stressed many of its concerns may prove temporary.

Japan's problems "will impact the global economy, which will in turn feed back to us," Singapore Foreign Affairs Minister George Yeo said over the weekend at a community meeting. Combined with uncertainties in the Middle East, "I think the world is entering a new phase, and we have to be very alert and not take things for granted and not be too confident," he said.

Markets across the region were mixed on Monday, with Tokyo stocks suffering their biggest fall in more than two years and indices finishing down in Australia and Taiwan. Shares in China, Hong Kong and South Korea edged higher, however, and some metal and building-materials stocks climbed amid hopes of spending on reconstruction projects.

In Australia, shares of uranium miners cratered amid fears that demand for nuclear power will wane after Friday's disaster. Paladin Energy Ltd., which operates a mine in Namibia, fell 16%, while Energy Resources of Australia Ltd., another uranium miner, dropped 12%. In Korea, meanwhile, shares in Kepco Engineering & Construction, a designer of nuclear power plants, and KR Plant Service & Engineering, which operates nuclear plants, both fell about 14%.

Other losers across the region included Cosco Pacific Ltd., a container terminal operator in Asia, which fell 3.3% in Hong Kong.

In China, government officials and analysts said they believed the country's economy would be only marginally affected in the aftermath of Japan's earthquake. But they warned market uncertainty could cause the government to delay further monetary tightening actions, and any protracted downturn in Japan could create problems.

The economies of China and Japan are entwined in everything from automobile and electronics manufacturing to tourism and the steel trade. China has increasingly become a final-assembly hub for Japanese electronics in recent years, as Japanese firms have sought cheaper manufacturing operations in order to remain competitive. China is Japan's largest export destination and Japan is the third-largest destination for Chinese exports, according to a report by Bank of America Merrill Lynch.

For the electronics industry, "I don't think the earthquake will massively impact China's electronics assembly business because most of us have reached a level of self-sufficient procurement," said Liu Xiaojun, a sales manager with Shanghai Lunsure Technology, which primarily produces semiconductors among other electronics components. "But we may see some shortages in terms of silicon chips and a few other special components because, after all, Japan makes the best silicon chips."

China might also be susceptible to fluctuating energy markets, particularly as Japan and other countries in the coming months may demand increased fossil-fuel supplies as nuclear power comes under increased scrutiny following a series of problems at tsunami-damaged nuclear plants in Japan.

"Japan will use more fossil fuels, like oil and coal, which may drive up the prices of fossil fuels in the short term," said Gao Shixian, a researcher at the Energy Research Institute of the National Development and Reform Commission, China's main economic planning agency.

South Korea's Ministry of Knowledge Economy noted Monday in an official assessment that Korea's exports could be hurt if conditions in Japan worsen. The ministry cited several key components imported from Japan that might be among the first disrupted, including steel for shipbuilding, system integration chips for electronics products and components for flat-screen panels.

Some countries are worried about the possible loss or delay of overseas development funds from Japan, which has long been a major source of capital for infrastructure projects in the region's poorer countries. It is helping pay for a mass transit system in Jakarta, geothermal and coal-fueled power plants, and other projects.

In a radio interview over the weekend, Philippines Senate President Juan Ponce Enrile said he feared development money from Japan would be delayed because of the disaster. "They will use their money for reconstruction, and so there will be a slowdown in their commitments to us, and subsequently a slowdown in our development projects," he said.

Analysts noted that a number of companies could be called into action to provide more supplies to Japan, including coal producers, timber companies, steelmakers, and possibly some natural gas providers.

Japan's rebuilding effort "could provide the catalyst needed to substantially jumpstart cyclically depressed housing starts, resulting in a sharp and sustained rise in demand for building materials such as logs, lumber, and structural panels" for one of the world's largest wooden housing markets, said Peter Ruschmeier, an analyst at Barclays Capital.

But other industries, like tourism, may find it harder to adjust. In Thailand, for instance, as many as 70,000 travelers have already canceled bookings for travel to Japan because of fears over radiation leaks, said Charoen Wangananont, president of the Thai Travel Agents Association. Some Japanese travelers to Thailand were also expected to cancel, he said. The association is now asking its members to offer 100% reimbursements to Thai tourists who scrapped travel plans and will ask airlines to provide 100% money back.(

William Heinecke, chairman and chief executive of Minor International, a Bangkok-based hotel and retail company that operates across Asia, said he's hopeful the drop in travel to Japan won't be a problem. Many of the travelers may reroute to other tourist destinations in the region, resulting in no net loss for big hospitality companies, he said. "We're still hoping for a very good year," he said.