The aftershocks of the March 11 earthquake in Japan are being felt in the world economy primarily through higher energy prices. Crisil Research estimates that with Japan shutting down 12.4 gigawatt of nuclear power capacity and Germany another 7.4 gigawatt, the price of liquefied natural gas could climb by as much as 50% over the next three months as the world’s third and fourth largest economies switch to alternative sources of primary energy. Coal prices are likely to fall till the Japanese steel mills — the country accounts for a quarter of the world’s coking coal trade — start rolling again while crude oil prices are held hostage by the crisis in West Asia, a Japanese switchover to oil will not have a significant impact. Refinery shutdowns in Japan, accounting for 9% of Asian capacity, have pushed up margins in Asia. But oil refiners elsewhere in the continent will have to grapple with high crude oil prices.
The second transmission mechanism is through Japan’s position in the global supply chains of a host of industries from cars to computer chips. General Motors has already halted production at a Louisiana truck plant because of a shortage of parts from Japan. Moody’s Investor Service points out that carmakers in the US have two months of inventories. But the 4.4 million cars sold by Japanese manufacturers remain vulnerable to seeing entire production lines grinding to a halt for the want of the proverbial pin from Japan. Similarly, US semiconductor manufacturers like Intel, AMD and Texas Instruments source a tenth of their revenue from Japan, which is the world’s largest supplier of raw silicon wafers. Likewise, over 40% of the world’s NAND flash memory chips used in mobile electronic devices such as smartphones and tablets are made in Japan. Already, spot prices of NAND memory chips have shot up by 20%. Again, Japan controls 90% of the global output of the basic resin used in integrated circuit chips and printed circuit boards.
India’s direct exposure to the Japanese disaster is likely to be limited on the trade account because our big exports to the country comprise natural resources like iron, which will be back in demand once reconstruction begins in the second half of this year. The immediate trade disruption as the Japanese industrial complex shuts down is unlikely to be prolonged. Japanese investments into India, however, may face a longer-term squeeze as the country restores its devastated infrastructure.