Japan shuts down as economic fears grow
by James Quinn and Jamie Dunkley - Telegraph
Japan's giant car industry has announced a major shutdown as fears grow over the economic impact of Friday’s devastating earthquake and subsequent tsunami which has crippled much of the north-east of the country.
The three largest motor manufacturers – Toyota, Honda and Nissan – said they would stop production at almost all of their domestic assembly plants. The safety of the workforce and deaths were cited as reasons behind the decision. The electronics giant Sony also said it would be shutting down production. Gerard Lyons, chief economist at Standard Chartered, warned of possible temporary price stagflation and an initial downward move for the country’s economy. "The timing of the disaster could not have been much worse," admitted analysts at Capital Economics, pointing to Japan’s economic contraction in the last three months of 2010.
The disaster forced the Bank of Japan (BoJ) to issue a statement, as it draws up plans for an emergency "quake budget". The BoJ said: "The bank will continue to do its utmost, including the provision of liquidity, to ensure stability in financial markets and to secure the smooth settlement of funds, in the coming week." Naoto Kan, the Japanese prime minister, asked BoJ to "save the country" after politicians from both sides of the political spectrum agreed on the need for the budget to introduce emergency spending to fund rescue and clean-up efforts and to resuscitate the economy.
Economists warned that the closures staged by the motor and electronics companies could be the tip of the iceberg, with other parts of industry likely to feel knock-on effects in the coming days. "Temporary closures of factories and oil refineries and the shutting down of power stations are likely to affect output throughout the country," said Wolfgang Leim of Commerzbank. "Economic output may therefore shrink again slightly in the first quarter."
Between them the three car companies closed 22 assembly plants, while Sony halted production at six of its domestic plants, including a Blu-ray factory where more than 1,000 workers were stranded yesterday. The closures are likely to damage Japan’s exports in the coming months, driving down economic growth yet further. "It is tough to know the extent of the damage and, therefore, also the cost," said Jim O’Neill, chairman of Goldman Sachs Asset Management. "Most of Japan’s recovery is driven by exports so the key is to make sure the yen doesn’t strengthen ."
Mr Lyons pointed out that after the Kobe earthquake in 1995 – which was in an economically more important region – the economy followed a V-shape performance curve, with an initial surge downward but with a strong rebound as policy stimulus and private spending returned.
Meanwhile, insurance analysts estimated that the earthquake could cost the global industry up to $10bn (£6.2bn). Although the Japanese insurance market is large, the amount of businesses and households that take out insurance cover is smaller than in Western markets, according to Risk Management Solutions. Most of the insured losses will be absorbed by global reinsurers such as Munich Re and Swiss Re, although companies operating in the Lloyd’s of London market will also suffer.
Japan Will Need to Boost Energy Imports
by Simon Hall and Mari Iwata - Wall Street Journal
Friday's closures of nuclear reactors will raise Japan's need to import oil and natural gas, but it remains unclear how much industrial output has been affected by the earthquake and tsunami and how long nuclear- and thermal-power plants will stay shut. Rising energy imports would underpin prices in an already highly volatile energy market. Japan is the world's third-largest oil user, and all of that oil is imported.
In July 2007, Tokyo Electric Power Co.'s Kashiwazaki-Kariwa's seven reactors in northwest Japan was closed due to an earthquake, and kept shut until 2009. Japan's largest electricity supplier had to pay much more to provide power. The struggle to contain a fire and radiation leaks at Tepco's Fukushima complex Saturday is likely to be followed by extended closures of those plants and other reactors while safety checks and inquiries are completed.
Energy-demand comparisons between the 2007 and 2011 earthquakes are further complicated by the impact of the global economic crisis, which hit oil, gas and coal use in Japan, as it did elsewhere. Oil traders have had to factor in sharp price rises and oil-market volatility in recent weeks caused by political turmoil in the Middle East. Ten nuclear reactors with a combined capacity of 8.6 gigawatts have been taken off line in Japan. Seven are operated by Tokyo Electric, two by Tohoku Electric Power Co. and one by Japan Atomic Energy Power Co. Tepco said it has suspended operations at five thermal power plants as well.
Japan isn't a big fuel-oil buyer, but it may need to ramp up imports of the refined product, which is used in thermal power stations, and also buy more crude oil to process into fuel oil in domestic refiners or for direct burning in its power stations. Late Friday, the Asian fuel-oil market reflected an anticipated demand increase, which could further tighten availability. Regional fuel-oil fundamentals are already tight as the heavy refinery maintenance season in Asia and the Middle East has cut supplies.
At least five refineries in Japan, with a combined oil-processing capacity of 1.2 million barrels a day, shut down automatically when they sensed the earthquake. This is roughly a quarter of Japan's total refining capacity. Two of them, JX Holdings Inc.'s refinery in quake-hit Sendai and Cosmo Oil Co. Ltd.'s Chiba facility, have been damaged, but how badly still isn't clear. Large numbers of tankers call at Japan's ports every day. Given the scale of damage to northwestern coastal areas and some ports, and disruption of the country's energy infrastructure, vessels may need to be diverted elsewhere.
Japan imported an average 3.7 million barrels a day of crude oil in 2010, up 0.8% on year. Imports of liquefied natural gas imports totaled 6.32 million metric tons last year, down 3%. If all the nuclear power capacity now off-line was replaced by natural gas, this would require between one billion and 1.2 billion cubic feet of gas a day, which could affect spot LNG prices in Asia and Europe, said Barclays Capital in a report issued Saturday. "Previous large-scale disasters in Japan and across Asia have tended not to produce discernible negative effects on demand...reconstruction tends to be highly a resource- and energy-intensive activity," it said.
Macquarie Bank said the tight coking-coal market may see pressure eased as a consequence of the earthquake while steel mills assessed damage, but that demand for thermal coal used in power plants could rise. The increased fuel costs and repair work from the 2007 earthquake were chiefly responsible for Tepco posting a 150 billion yen ($1.82 billion) loss for the year ended March 2008. Tepco's oil use jumped around 50% on year to 9.99 million kiloliters in 2007-08.
