Japanese production of autos, computer chips, other goods at risk

By Neil Irwin and Howard Schneider, Monday

The damage wrought by the earthquake in northern Japan has disrupted production of automobiles, computer chips and a range of other goods and could force prolonged shutdowns in a key node of the global economy.

The Japanese stock market fell 6.2 percent Monday, as investors began to price the full scope of the damage. That came despite a massive infusion of yen by the Bank of Japan to try to prop up the nation’s financial system.

U.S. and European markets were mildly down, with the Standard Poor’s 500 off 1.1 percent at 1 p.m.

“The full extent of the devastation caused by the earthquake and tsunami that struck northeastern Japan on Friday only began to become clear at the weekend, and the economic impact remains highly uncertain,” John Higgins, an analyst at Capital Economics, said in a report.

The area of Japan that suffered the most direct hit from the earthquake accounts for a relatively small portion of the industrial output of the world’s third-largest economy. However, damage to Japanese infrastructure -- roads, rail lines, electricity -- is more widespread.

That disruption has compromised the ability of Japanese manufacturers to obtain supplies and electricity to continue output and for their employees to get to work. It is too soon to know how much world supply chains for key goods will be affected. Global businesses have been able to work around national disasters in the past, such as the aftermath of the Indian Ocean tsunami in 2004 and Hurricane Katrina in 2005.

Many auto plants across Japan have shut down, at least temporarily, wrote auto analyst Paul Newton of IHS Global Insight, who described the situation as fluid. Some of the shutdowns are due to rolling blackouts “to conserve power in light of the damage to several Japanese nuclear power plants; and some through disruption to the country’s transport infrastructure, affecting everything from parts delivery, personnel mobility, and shipping activity at the country’s ports.”

Toyota idled all its Japanese factories through Wednesday, halting production at 45 percent of the auto giant’s global production. Nissan, Honda, Suzuki, Mazda and Mitsubishi all reported varying amounts of damage and temporary shutdowns at their Japanese plants.

Japan’s top corporations include major global brands that have moved production overseas. Honda, for example, has already projected that its operations in the critical North American market would not be greatly affected.

It is unclear whether the shutdown of Japanese auto parts suppliers will last long enough to affect production in the United States. U.S. automakers and Japanese firms with assembly plants in the United States rely on Japanese exports for some of their key parts.

There are also potential disruptions in the supply and shipping of electronics, particularly of key materials used in the manufacture of LCD panels, according to a report by analyst Dale Ford of IHS iSuppli, which researches supply chains.

“This is likely to cause some disruption in semiconductor supplies from Japan during the next two weeks,” Ford said.

Analysts around the world will be watching closely to see how this new round of economic uncertainty is received by markets balancing a U.S. economic recovery with rising oil prices and other emerging risks. They warned that extended power disruptions in Japan or greater damage to manufacturers could undercut a global economic recovery that was beginning to gain momentum. The crisis will challenge Japan’s financial system and energy infrastructure, as well as its capacity for dealing with a humanitarian disaster.

The central bank announced Monday that it will put a record $183.8 billion into the economy to keep the country’s financial system stable and its trading system functioning. It pumped 15 trillion yen in immediate liquidity into the financial system and said it would boost a program of purchasing assets to 40 trillion yen from 35 trillion.

But the magnitude of the nation’s economic challenge hit home on the the first working day since the quake struck. Monday dawned on rolling blackouts and hoarding.

The insured property losses from the quake could amount to between $14 billion and $35 billion, according to Air Worldwide, a risk consulting company.

Japan is already groaning under government debt equal to twice its yearly economic output, proportionally the world’s largest load. But analysts said the country should have the financial muscle to deal with the reconstruction and be able to borrow what it will need to bounce back without, for example, using nontraditional methods such as spending down its trillion-dollar stockpile of international currency reserves.

Japan has the borrowing power “to respond to this tragedy,” said Mohamed El-Erian, chief executive officer of investment fund Pimco.

Money is likely to also flow from Japanese investments overseas back to the country, a phenomenon that may have been behind the jump in the value of the yen Friday after the disaster.

The Tokyo exchange was open only half an hour longer after the earthquake struck but in those closing minutes dropped 1.7 percent. The weekend’s events are likely to shape trading worldwide amid expectations that problems at Japan’s nuclear facilities may prompt countries to rethink the use of nuclear power and boost demand — and prices — for oil and other fuels.

The country has lost about 6,800 megawatts of power-generating capacity after nuclear plants were damaged, perhaps seven percent or more of its total supply, analysts with Barclays Capital said in a research note. But the effect on industry and economic activity won’t be clear until it is known how long the plants will be off line, how the lost power can be replaced and whether potential radiation leaks have been contained.

The global impact could be unpredictable in an era when markets, investors and policymakers have become increasingly concerned about the way shocks in one country can ripple through the world in unexpected ways.

In its most recent detailed analysis of Japan, the International Monetary Fund said it was concerned that any disruption to Japan’s tentative return to economic growth could send the country into a deep deflationary spiral, with wages, prices and investment falling and households and businesses reluctant to spend on the expectation that they will fall even more. Although Japan’s economy, with its aging population and stagnant incomes, is not a driving source of world demand for goods and services, it does play an important role in world trade. A renewed recession there could deal a broader blow to confidence in the recovery.

“A slow recovery carries risk that deflation and could become more entrenched,” the IMF concluded. It noted that public opinion in Japan, since 2007, had quickly been turning toward an expectation that prices would fall in the future.

At the same time, the IMF has been pressuring Japan on its government debt, and arguing that large and rising deficits — something that may now be unavoidable — were also a risk to growth.

At least in the short-run, “Japan’s tragedy will also impact other countries via temporary head winds in the form of lower global demand and interrupted supply chains,” El-Erian said.