Japan Power Shortage Poses Growth Risks in Asia, S&P Says

Disruptions in Japan’s power supply after the world’s strongest earthquake in more than six years may affect the country’s economic output and hurt the rest of the region, Standard & Poor’s Ratings Services said today.

“There is a potential risk that because of the shortage of supply of electricity, general economic activities in Japan will be affected,” Takahira Ogawa, a Singapore-based credit analyst at S&P, said on a conference call today. “If that is the case, there will be indirect implications on the economies in Asia.”

Companies such as Sony Corp. (6758) and Toyota Motor Corp. have halted production after the 9.0-magnitude temblor and an ensuing tsunami damaged power-generating facilities including the Fukushima Dai-Ichi nuclear plant. Japan may enter a brief recession as a result of its worst earthquake on record, said Rhee Chang Yong, the Asian Development Bank’s chief economist.

That may cloud the outlook for Asian economies including China, the biggest destination for Japan’s exports and the largest source of its imports.

“China’s exports may take a noticeable hit because of the production suspension at Japanese electronics companies and automakers,” said Lu Zhengwei, a Shanghai-based economist with Industrial Bank Co. “The pace of yuan gains may slow markedly.”

Industrial Bank forecasts the yuan may appreciate 4 percent to 5 percent against the dollar this year, from a previous estimate of as much as 6 percent.

Tokyo Electric Power Co. (9501) has begun rolling blackouts that will continue until the end of April to conserve electricity.

South Korea

South Korean exports and industrial production will probably be hurt if the earthquake in Japan disrupts supplies from that nation for an extended period, the Ministry of Knowledge Economy said March 14. Steel supplies may be affected, display-panel prices may rise due to shortages, while South Korea’s shipments of car parts to Japan could slow because of the quake’s impact on Nissan Motor Co. and other Japanese automakers, the ministry said.

Still, the impact on Asia’s growth may be limited and temporary, and policy makers should resist the temptation to delay raising interest rates, said Frederic Neumann, an economist in Hong Kong at HSBC Holdings Plc.

“Consumption demand in Japan will almost certainly slow in the coming months,” he said in a note today. “Eventually, however, this will be offset by greater government and private expenditure on rebuilding efforts, with an emphasis on housing, infrastructure, and electricity generation and transmission.”

Shares Recover

Asian shares rallied for the first time in five days today after the Nikkei 225 Stock Average’s biggest two-day drop since 1987 left valuations at a 28-month low and as commodities gained.

The region’s exports to Japan slowed for about six months after the Kobe earthquake in 1995 before rebounding, Citigroup Inc. economists Johanna Chua and Kit Wei Zheng said in a March 15 note. Since then, Japan’s share of Asian exports has dropped to 7.3 percent in 2010 from 12.3 percent in 1995, they said.

The cost to Japan’s government from this month’s earthquake will be “much higher” than that for the Kobe temblor, S&P’s Ogawa said. Any rating action for Japan will depend on the extent of the economic damage and costs of the disaster, and it’s too early to determine those, he said.

“Despite uncertainties, the impact on Asia growth should not be exaggerated,” the Citigroup economists said. “The slowdown in Japan imports post-Kobe was more pronounced in industrial materials and consumer goods, while capital equipment imports posted a strong rebound.”

Japanese Trade

While Japan’s economy has slipped to the third-largest worldwide after China and the U.S., it still ranks fourth in merchandise exports and fifth in imports, according to World Trade Organization figures.

Malaysia, Singapore and Thailand look “relatively more vulnerable” to a sharper slowdown in exports to Japan, the Citigroup economists said. Slower exports to Japan could be offset by stronger shipments for similar goods from countries such as South Korea and Taiwan, they said.

In Thailand, where Japan is the third-largest export destination after the Southeast Asia region and China, shipments to the quake-stricken nation may fall 7.2 percent because of lower purchasing power after the disaster, according to the University of Thai Chamber of Commerce.

The earthquake may affect Thai automobile production, because manufacturers import some parts from Japan, and hurt the tourism industry, Finance Minister Korn Chatikavanij said March 14.

Malaysian Shipments

Malaysia’s exports to Japan may fall as much as 10 percent this year, said Manokaran Mottain, an economist at AmResearch Sdn. in Kuala Lumpur. Along with the turmoil in the Middle East, the impact from the quake may shave 0.3 percentage point off Malaysia’s growth this year, he said.

“Electrical and electronic exports to Japan and the rest of Asia are a major contributor to Malaysia’s industrial production, and a supply disruption is unwelcome,” said Michelle Chia, an economist at ECM Libra Investment Research in Kuala Lumpur.

The earthquake in Japan will have a “marginal” impact on India’s trade and investment, according to Chakravarthy Rangarajan, chairman of the Prime Minister’s Economic Advisory Council. Indian exports to Japan make up only 2 percent of the nation’s total overseas sales while foreign direct investment from Japan accounts for 4 percent of the inflows, according to the country’s commerce ministry.

Yen Repatriation

Japan may withdraw savings from abroad and reduce private capital from regional financial markets to fund its reconstruction, the ADB’s Rhee said yesterday.

In Indonesia, the central bank sees a “mild” possibility of yen repatriation following Japan’s earthquake, Deputy Governor Hartadi Sarwono said in Jakarta today. Japanese investors are institutional investors with long-term commitments, Sarwono said.

The Philippine central bank will consider the implications of the earthquake in Japan when it reviews monetary policy next week, Governor Amando Tetangco said March 13.

The main challenge for policy makers in Asia will still be inflation, said HSBC’s Neumann.

“Over the next couple of months, we had expected China, India, Indonesia, Korea, the Philippines, Singapore, Sri Lanka, Taiwan and Thailand to tighten monetary policy,” said Neumann. “However, financial market volatility could delay these moves well into the second half, if not further. The risk then would be that officials would need to deliver an even more forceful punch to compensate for the current holdup and bottle up rising inflation expectations.”

Beyond the impact of Japan’s earthquake and nuclear crisis, risks to global growth remain from rising oil prices and Europe’s debt crisis, according to S&P.

A surge in crude prices past $148 per barrel may lead to signs of “panic” among consumers and increase the risk of a so-called double-dip recession, said David Wyss, global chief economist at the ratings company.

To contact the reporter on this story: Shamim Adam in Singapore at sadam2@bloomberg.net

To contact the editor responsible for this story: Stephanie Phang at sphang@bloomberg.net

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