Economic prospects of Japanese crisis and its impact on Sri Lanka economy

Following are excerpts from an initial assessment done by Asia Wealth Management/Asia Research team on the impact on Sri Lanka following the 11 March devastating earthquake and tsunami in Japan:

The estimated cost of destruction of Japan’s productive forces by the devastating tsunami which invaded the country’s north eastern coastline is believed to exceed US$ 100 billion, which is two per cent of the country’s GDP – and nearly double that of Sri Lanka’s.

The most important aspect of the ongoing crisis in Japan is that unlike previous natural and manmade catastrophes, the rebuilding process together with the production process of Japan is at a virtual standstill owing to the burst of radiation from the earthquake stricken nuclear power plant in Fukushima and with the 11 nuclear power plants closed down, stifling country’s production structure with the lack of supply of productive energy.

If not for the nuclear crisis displaying no sign of settlement in the near future, the rebuilding process of Japan could have commenced.

Hence, if not for the nuclear catastrophe that has gripped the eye of investors and policymakers alike, the devastation caused by the tidal waves and the earthquake could have placed the deflating Japanese economy in a period of economic revival in the medium to long term – the chances of which are still open as they are waiting to materialise soon as the ‘nuclear gridlock’ ends.

This is so since the destruction of economic wealth including means of transport (vehicles, roads, bridges, etc), household equipment (consumer durables, clothing material, furniture), dwellings, commercial buildings and office equipment, etc., due to natural disasters or conflict requires that the latter has to be repurchased, meaning they have to be reproduced.

Reproduction and rebuilding of this ocean of products and structures demands a remarkable increase of the investment ratio of the economy, which absorbs excess liquidity levels or surplus capital lying idle in the system (currently contracting the Japanese economy), increasing employment levels and incomes of employees as well as businesses leading to a worthy increase in the rate of increase in the real GDP in the medium to long term.

Therefore, the earthquake which struck Japan and the resulting series of killer waves could have ousted the long-drawn-out economic impasse of the Japanese economy in particular. Japan much like the rest of the world is currently experiencing a downturn noted by the deflationary phase of its economy and the losses incurred by certain major Japanese conglomerates in recent years.

However, the destruction of country’s productive assets bears the tendency to act as an objective counter measure battling against the forces of economic stagnation by drumming up the aggregate demand in the system when the economy steps into a rebuilding phase.

The only major impediment standing in the way of such economic revival is the nuclear catastrophe, which has crippled the industrial juggernaut of the country by forcing the masses to remain indoors and by crippling the productive energy supply of the economy.

Hence, no sooner the nuclear crisis in Japan subsides, demand for almost all productive metals and raw materials are bound to increase, drawing up a favourable picture – especially for Sri Lanka’s natural rubber producers. Also apparel exports to Japan from Sri Lanka are very likely to record an increase for reasons explained earlier.

Nevertheless, considering the positive outlook of Japanese economy in the medium to long term, investors will consider the current dip in Japanese equity markets as an ideal opportunity to collect fundamentally strong stocks with upward potential at relatively low prices. Hence, foreign portfolio inflows to Sri Lanka could record a decrease with investors preferring Japan as a market with cheaper counters and higher upward potential.

Therefore, the renewed long term prospects of the Japanese economy will also put downward pressure on price of speculative assets such as gold due to investors moving away from the latter to reap the benefits of Japanese equity markets.

In addition, the grants received by Sri Lanka from the Japan could temporarily arrest, decreasing the availability of cost-free foreign funds of the Sri Lankan Government.

Also, with the closing down of 11 nuclear plants in Japan and the country experiencing regular blackouts and shortages of productive energy, it is highly likely that crude oil will be used as a substitute for nuclear energy in electricity generation. Hence, it is likely that crude oil prices will increase as a short term phenomenon which will have a bearing on the growth prospects of Sri Lanka in the short to medium term.