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Japan braces for economic aftershocks

The widespread damage from Japan's deadly earthquake and tsunami will create economic and financial aftershocks for dozens of specific companies and industries. The overall impact? Relatively small.
Image: Cars and airplanes swept by a tsunami are pictured among debris at Sendai Airport, northeastern Japan
Cars and airplanes swept by a tsunami are pictured among debris at Sendai Airport, northeastern Japan. A massive 8.9 magnitude quake hit northeast Japan on Friday, causing many injuries, fires and a ten-metre (33-ft) tsunami along parts of the country's coastline.KYODO / X01481

The widespread damage from Japan's deadly earthquake and tsunami will create economic and financial aftershocks for dozens of specific companies and industries. But the overall impact on Japan's beleaguered economy may be relatively small.

Ironically, the influx of insurance claims to repair and rebuild could even provide a short-term economic stimulus.

The human toll is still being assessed after the 8.9 magnitude earthquake triggered a deadly 23-foot tsunami that swept away people, cars, houses, boats and planes. Dozens of people were killed, hundreds more are feared dead and tens of thousands have evacuated their homes.

The quake was centered in the northeast city of Sendai, a rice-growing region that is also home to auto and chip manufacturing plants.

The quake brought Tokyo, Japans' financial center, to a virtual standstill Friday, overloading the city's phone system and paralyzing a transit system that left millions of passengers stranded. Millions of homes across Japan were without power.

Tokyo Gas Company shut off supplies to more than 35,000 households and facilities in the Kanto area in eastern Japan. In Chiba prefecture, east of Tokyo, a major fire broke out at Cosmo Oil Company's refinery, shutting down all operations. Tokyo Disneyland was closed Saturday and was undecided about opening on Sunday. There were no initial reports of injuries to visitors or staff.

Many companies were busy assessing damages. Nestle shut down operations at its Kasumigaura factory and Nippon Paper Group suspended production in Miyagi and Fukushima prefectures. Chemical manufacturer Asahi Kasei Corp. shut down and evacuated workers due to a power outage. Drug maker GlaxoSmithKline suspended operations at its manufacturing plant. A spokeswoman said that "minor damage" to the plant would require suspension of production for "a few days."

Japan's automakers were among the hardest hit, though the damage appeared to be limited. More troubling was the closure of all of Japan's major ports, which could crimp Japanese exports to North American if they remain closed for long, analysts said.

"It's a very bad situation," said Dennis Virag, president of the Automotive Consulting Group. "Japan has excellent ports but they're going to be the focus of rescue efforts. I don't know how much (non-relief shipping) is going to be going out for while," he said.

Earlier this month, Toyota said slim inventory of its Lexus luxury brand was hurting sales in North America. All of the Lexus models sold in North America are made in Japan with the exception of the RX sport utility vehicle.

Baird analyst David Leiker said infrastructure damage from the quake could affect the shipments of parts and vehicles.

"The situation requires watching," Leiker said in a note for clients. "The Japanese supply base ships components around the world and (this) could have a ripple effect anywhere."

Toyota reported that, after a temporary shutdown of three factories, all plants had restarted production and that the company was still assessing the impact on its suppliers. Some dealers reported damage.

Fuji Heavy Industries, makers of Subaru cars and trucks, shut down eight of its 10 factories, including all five car and car parts plants in Gunma prefecture, north of Tokyo. Fuji also suspended production at its aircraft and power products factory in Tochigi prefecture.

Honda Motor reported that a 43-year-old male worker died after a wall collapsed at its research and development center in Tochigi prefecture. Collapsing walls at other nearby Honda facilities injured some 30 employees.

Several makers of chips used in smartphones and tablets shut down, prompting some concern that prices could spike in the short run. But analysts said it would likely have only a limited impact on global supplies.

Toshiba, the world's second biggest supplier of NAND flash memory after Samsung, closed its factories.

Electronics maker Sony closed six factories in the area hit hardest by the quake, but was still assessing the extent of damage. The plants make semiconductors, batteries, optical film and other components.

Power companies nearest the epicenter were rocked by the quake In Miyagi, Tohoku Electric Power reported smoke in a turbine room at its Onagawa nuclear reactor, but said there was no sign of a radioactive leak. Three additional reactors in at its Fukushima Daiichi nuclear plant automatically shut down, and no radioactive leakage was found, although officials said pressure was rising inside Fukushima No. 1 after the cooling system failed. The U.S. Air Force delivered coolant for the plant, Secretary of State Hillary Clinton said.

Damage from the hardest-hit areas will have a devastating financial impact on individual businesses and households. But while the quake's damage tally won't be known for weeks, the long-term impact on the Japanese economy may be limited. As often occurs after natural disasters in well-insured areas, the coming influx of money to settle claims will likely provide a short-term stimulus to Japan's economy.

"This is clearly going to add complexity to Japan's challenge of economic recovery and may lead to temporary increments, ironically, to GDP as a process of rebuilding takes place," Lawrence Summers, and economist and president emeritus at Harvard University. "In the wake of the earlier Kobe earthquake, Japan actually gained some economic strength."

Despite the Japanese government's aggressive efforts to stimulate growth, Japan's economy remains mired in a period of stagnation that has lingered for decades. In the fourth quarter of last year, Japan's Gross Domestic Product shrank at an annual rate of 1.1 percent from the third quarter.

On Friday, the Bank of Japan pledged to all it it could to ensure markets remain stable, including providing liquidity to the economy, if necessary. Japan's central bank will hold a meeting Monday.

Japan's financial industries, a major engine of growth, appear to have been spared. Citigroup, for example, said it had sustained no damage to its trading facilities and was operating normally after the quake.

In the short-term, the global insurance industry will bear the brunt of the financial burden. Insurance stocks were hit hard in European trading following news of the quake. Shares of Aflac, the largest insurer in Japan in terms of individual insurance policies in force declined, fell sharply. Swiss Re, Munich Re and Hannover Re — so-called "reinsurers" which provide backup insurance to other insurers — were also trading lower.

"It is too early to tell what the impact will be," said Tom Armitage, a spokesman for Swiss Re. "It usually takes one to two weeks until we can tell."

As a developed country, insurance coverage is relatively widespread in Japan. Following the 1995 quake in Kobe, for example, insurance claims came to $3 billion on estimated total damages of $100 billion, according to Munich Re. The 2008 earthquake that devastated Sichuan, China, by contast, resulted in total damages of $85 billion, only $300 million of which was covered by insurance. In the U.S., roughly a third of the $45 billion in losses from the 1994 Northridge, Calif., quake was covered.

The insurance industry is still tallying up losses from the powerful earthquake that struck New Zealand last month, with total insured losses projected at between $8 billion and $12 billion from that disaster.

Oil prices, which have been a concern recently as turmoil in the Middle East has pushed prices well above $100 a barrel, fell below that number for the first time in weeks on Friday.  

Japan is the third-largest oil importer in the world. It's unclear how much its economy will be affected by the disaster. The news helped slow down what had been a sharp, three-week rally in oil markets.

Benchmark West Texas Intermediate for April delivery tumbled $2.06 to $100.64 per barrel in morning trading on the New York Mercantile Exchange. Prices dropped as low as $99.01 per barrel earlier in electronic trading.