The massive, 9.0-magnitude earthquake that struck Japan, and the equally staggering tsunami that followed happened one year ago Sunday. Unfortunately, the memories of the pain and suffering in Japan still remain fresh in the minds of many, particularly those survivors in Japan still mourning the loss of loved ones. The quake and its aftermath, which included a lengthy struggle to prevent a catastrophic meltdown at the Fukushima nuclear plant, had a tremendous human toll that cannot be understated.
However, while the loss of life is clearly the most tragic part of this story, the economic effects of the quake were not insignificant. A myriad of Japanese companies found themselves laid low by the quake, with their businesses destroyed or damaged or supply chains seriously disrupted. So, one year later, what can now be said about the economic impacts of the Japanese earthquake.
Already Sluggish Economy Thrown into Recession
Prior to the earthquake and tsunami, Japan was already mired in sluggish economic growth that had persisted for years. Japan's lengthy period of constrained growth took a hit both from the destruction of the quake and tsunami and the lengthy nuclear disaster that followed. Japanese GDP contracted at an annualized rate of 6.8 percent in the first quarter of 2011 and ultimately shrank by 0.7 percent for the entire year.
While the Japanese economy is currently on the rise, much of that is believed to be associated with the reconstructions efforts currently underway and could fade away once those are completed.
"We are seeing positive effects of reconstruction on the economy right now but they won't last for a long time," said Takahide Kiuchi, chief economist for Nomura Securities. "Japan's economy could well be in worse shape than before the disasters, once reconstruction demand dissipates."
What's more, Japan's already high levels of government debt have increased while trying to pay for the reconstruction efforts. Japan's debt is projected to reach 227 percent of its economy by the end of 2013, an increase of 27 percent since the end of 2010.
Automakers Finally Returning to Form
Some of the most important drivers for the Japanese economy are its successful automakers like Toyota (TM), Nissan (NSANY), and Honda (HMC). The auto industry was rocked by factory closures, damaged facilities, and rolling blackouts that came to a head in the summer of 2011. That summer, as market share and retention rates reached 12-month lows, Japanese automakers lost serious ground to the recovering American automakers. The market share in the United States for Japanese automakers fell from 38.5 percent in February to 30.1 percent in June. Now, though, Japanese automakers appear to have bounced back, according to Edmunds.com, and have returned to pre-quake levels of market share.
"The March 11 earthquake and tsunamis revealed the vulnerabilities of Japan and its once-invincible automotive industry," says Michelle Krebs, Sr. Analyst at Edmunds.com. "But as humbling as the business fallout was in the weeks and months after the disaster, a lot of credit is due to top company executives who resourcefully restored business operations to 'normal' levels in less than a year."
One reverberation from the quake that might not have been as predictable has been the shift in Japanese energy policy that followed the near disaster at the Fukushima Daiichi nuclear power plant. While one could argue that the degree of radiation release at the plant in the context of the enormity of the disaster that hit the plant speaks to the relative safety of nuclear power, the public perception was decidedly negative. Nuclear power, an industry that already struggles with how it's viewed by the general public, took a serious blow in the aftermath of the Fukushima plant's meltdowns.
The reactors, designed by General Electric (GE) and maintained by The Tokyo Electric Power Company (9501.TYO), suffered meltdowns after the power generators that were meant to keep the cooling system operating even if external power was cut off were damaged by the tsunami. The broader result has been a decision by the Japanese government to shut down all 54 nuclear reactors in the country. While long-term plans for replacing the lost electric capacity are in the works, the short-term reality is that Japan has to rely on expensive energy imports. Japan generated over 30 percent of its electricity from nuclear power, so the shift away from nuclear looks to be a painful one. However, Japan does appear committed to focus on renewable energy for a big chunk of the difference as sales of solar cells in Japan went up 30.7 percent in 2011.
Crippled Economy May Lead to Industrial Flight
One more issue facing the Japanese economy could also be the flight of manufacturing jobs that could follow a disaster of this magnitude. Japan, which relies heavily on its exports to drive the economy, has seen many of its major companies reconsidering basing operations out of Japan. A survey conducted last year by the Japan External Trade Organization revealed that some 30 percent of large companies were seriously considering building new operations overseas in the aftermath of the quake and tsunami.
DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer