It is a plain and simple truth that in the past several weeks, life in Japan has taken on new meaning as words like tsunami, Fukushima, and rolling blackouts become part of the daily vernacular. As the world’s third largest economy, the combined effects of the 9.0 magnitude earthquake, subsequent tsunami and ongoing situation at the Fukushima Daiichi power plant will undoubtedly have a greater impact on the global economy than many other natural disasters that have come before it.
Given that Japan is one of the U.S.’ closest allies, many American and Japanese business people based in the nation’s business hub of New York City, home to the economic barometer that is Wall Street, are now attempting to divine the real long term impact of the earthquake on the U.S.-Japan economic partnership from across the Pacific.
ECONOMIC AFTERSHOCK
On the southern tip of Manhattan, the Japanese and American flags hang side-by-side at the New York Stock Exchange on Wall Street. On March 14, just three days after the historic quake, Ambassador Shigeyuki Hiroki, Consul General of New York along with representatives from the Japanese Chamber of Commerce and Industry in New York (JCCI NY) and the Japan Society, rang the closing bell at the NASDAQ MarketSite in Times Square. As a symbol of the U.S.’ economic wealth and prosperity, Wall Street’s show of solidarity for Japanese businesses illustrates the close economic ties linking the U.S. to the world’s third largest economy.
According to figures from the U.S. Census Bureau’s Foreign Trade Division, trade between the U.S. and Japan totaled over $180 billion in 2010. New York (as well as Los Angeles, and Washington D.C.) is also home to a number of U.S. branches of major Japanese banks, trading companies and corporations. On a more local level, Japanese expats, along with Japanese-Americans have created vibrant small business communities across the U.S., including Japantown in San Francisco.
Regardless of size, the tragic events of March 11 have had a profound effect on Japan-related businesses, companies and organizations worldwide. In the short to medium term, the spotlight will understandably remain fixed on the ongoing crises and reconstruction. Going forward, however, the questions facing the Japan-U.S. partnership will not be limited to just how far the “business aftershocks” reach, or how long they will last. It will be a question of how to adapt.
CRUNCHING THE NUMBERS
Preliminary figures from the Japanese government estimated that the total losses caused by the earthquake could range from 15 trillion to 25 trillion yen ($168 billion to $309 billion), making it the costliest natural disaster in modern history. In comparison, Hurricane Katrina in 2004 cost insurance companies an estimated $125 billion, while the Great Hanshin Earthquake in 1995 cost the Japanese government $100 billion. Combined with potential power shortages that may last well into the summer, there’s no question that Japan faces a number of obstacles in its long road toward recovery.
“The 25 trillion yen figure provided by the Japanese government figures does not include losses in economic activity from planned power outages, the crisis at a stricken nuclear power plant in Fukushima or radiation contamination of agricultural products and water in the neighboring prefectures,” said Takashi Imamura, Vice President and General Manager of Marubeni America Corporation’s Washington Office. “I assume comprehensive damage from the four disasters may reach 30-35 trillion yen.”
Currently, Japan accounts for roughly 9 percent of the total global economic output—a number both telling and surprisingly counterintuitive in terms of how these numbers will add up on an international scale. It would seem only logical that a disaster of such scale in a major economy would lead to massive, if not crippling economic repercussions worldwide—especially for the U.S. However, the general consensus among experts is in fact, quite the opposite.
“The big story is that the overall impact will be surprisingly small,” said Edward Lincoln, Director of the Center for Japan-U.S. Economic and Business Studies at New York University. “The magnitude is actually not that large. The areas most heavily affected—Iwate, Miyagi, and Fukushima prefectures—account for only four percent of Japan’s total GDP.”
Michael Auslin, Director of Japan Studies at the American Enterprise Institute, agreed, stating that, “The long term effect on U.S.-Japanese economic relations is fairly limited. The short to medium term issue is the loss of productive capacity.”
GLOBALIZATION AND THE EARTHQUAKE
To be sure, the most visible impact of the earthquake on an international scale were the various disruptions in the global supply chain. Automobile companies such as Toyota, Nissan Motors and Honda were forced to halt production and shipment of vital components, which in turn caused shortages overseas. In the U.S., these shortages caused both General Motors Co. and Ford Motor Co. to suspend or divert a percentage of their operations. A survey by an auto parts manufacturing group reveals that 74 percent of U.S. automakers import components from Japan, while 69 percent reported troubles in receiving parts from Japan.
Automobile companies were not the only ones affected by global supply chain issues. Since Sony’s Walkman became a household name in the 1980s, Japan has built a global reputation for all things electronic, and produces hundreds of vital components found in a wide variety of high-tech products ranging from smartphones to LCDs. According to industry estimates, Japan produces 60 percent of the world’s supply of silicon wafers, an essential component used in building computer chips. Immediately following the earthquake, rumors abounded that Apple might have to delay the launch of its newly announced second-generation iPad. While as of this writing, Apple has yet to confirm or deny any delays, the mere implication speaks volumes.
Outside Japan, however, the problem is likely to be only a temporary setback. For instance, most auto companies in North America, Europe and South America have significant, independent regional operations, and can conduct most of their production at home.
“If anything, the shortages in the global supply chain reminded the world of the strength of the Japanese economy,” said Michael Green, Senior Advisor and Japan Chair of the Center for Strategic and International Studies. “The world depends on Japan quite a lot. Companies such as Toyota and Panasonic are global, agile and resilient. In six months’ time, they’ll be fine.”
Similarly, the impact on recent efforts by Japanese companies to globalize is likely to be minimal. Prior to the earthquake, many Japanese companies took advantage of a rising yen to extend their global reach. From April to September of 2010, Japanese firms from a wide variety of sectors spent a record 1.53 trillion yen in foreign acquisitions—a 54 percent increase from 2009. Moreover, companies such as Rakuten and Uniqlo made headlines by making English the official company language in an effort to increase their global competitiveness.
“There won’t be much impact on Japanese corporations trying to globalize as long as the aftermath of the quake doesn’t affect their ability to produce goods and services sourced in Japan,” said Robert Dujarric, director of Temple University’s Institute of Contemporary Asian Studies (ICAS).
“Companies such as Uniqlo get their supply from China,” adds Lincoln. “If anything, recent events may encourage them to be more aggressive overseas.”
The direct effect on Japanese companies who have already established offices in the U.S. is also likely to be minimal. “Trading companies are largely independent. Operations in the U.S. have not suffered,” said Imamura. Instead, he suggests that some companies may shift focus towards building U.S. interest in exporting to Japan or China.
However, power shortages caused by the nuclear situation in Fukushima have, for the time being, shrouded U.S. companies interested in the Japanese market under a veil of uncertainty. “The energy dilemma is the real elephant in the room,” said Paul Scalise, a TEPCO expert from Temple University’s ICAS. “The real question no one wants to talk about is: What happens when the lights go out?” Blackouts in Japan average a mere four minutes per year, compared to an average of 69 minutes in the U.S. According to Scalise, should such disruptions in power continue, it could lead to an alternative energy renaissance—provided it gains enough political momentum to offset its relatively expensive infrastructure costs and technological constraints.
Recent murmurs from the DPJ have also hinted that the proposed corporate tax cut could be suspended to help pay for reconstruction costs. At 40 percent, Japan’s corporate tax is one of the highest in the world, especially when compared to the 25 percent and 24.2 percent corporate income tax rates in China and South Korea. “Asia as a whole remains an attractive market,” explains Auslin.
“Backtracking on the corporate tax cut could affect foreign companies interested in entering into joint ventures or setting up subsidiaries in Japan.” Additionally, should uncertainty persist, it is not unlikely that some companies may turn to South Korea, China or Taiwan as an alternative business supplier.
“You might have a situation where U.S. companies contemplate new investments,” adds Lincoln. “For instance, if a company has $100 million to spend in Asia, I can imagine a conversation at corporate headquarters where investors look at Japan in terms of the earthquake, tsunami and nuclear situation and perhaps invest elsewhere.” However, Lincoln goes on to emphasize that companies whose success is contingent on the Japanese market, or who have a vested interest in Japan are unlikely to be swayed by recent events.
LOCAL KNOW-HOW
Just as the “business aftershocks” from the Tohoku Earthquake rippled out into the world economy, so too will the actions and outpouring of goodwill from overseas ripple back towards Japan. On March 18, the G-7 countries intervened to stem the sharp and sudden appreciation of the yen, which soared to post-World War II highs of 76.25 yen to the dollar. The intervention—the first coordinated effort by the G-7 in ten years—had an immediate effect, as the yen quickly weakened to pre-quake levels of roughly 80 yen to the dollar.
However, aside from intervening in currency markets and participating in humanitarian efforts, experts agree that there is little that foreign governments can actually do to prevent Japan’s weakened economy from slipping further. But where governments may be limited to helping at a more macro-level, local businesses in the U.S. paint a very different picture of how the U.S. can help Japan.
Spurred by a sense of helplessness, many Japanese and American business leaders in the U.S. have taken it upon themselves to do what they can to expedite Japan’s recovery and reconstruction. Within a week of the disaster, exchange students, volunteers and Japanese expats armed with donation boxes flooded Union Square, Grand Central Station, and the Empire State Building to raise money for the Red Cross and other NPOs. The business community was not far behind.
Soon after the earthquake, the JCCI NY collaborated with the Nippon Club to create a united relief effort from the Japanese business community in New York. “Right from the day the disaster struck, the Chamber has been contacted regularly by our member companies inquiring about how they can help with fundraising for relief efforts,” said Tsutomu Karino, Executive Director and Secretary of the JCCI NY. “Our member companies have not only donated their own money but have also involved their employees with matching contribution campaigns.”
“We have nothing to lose,” said Chikako Ichihara, CEO and President of Azix Inc., which sponsored the weeklong Dine Out for Japan event in collaboration with NBC Universal and the New York Restaurant Association. The event organized over 70 restaurants both big and small to pledge 5 percent of their sales from March 23 to March 30 in donations for the Red Cross. “New Yorkers love eating food from different restaurants and cultures, so by doing this, we could help in a more natural way.” Restaurants were encouraged to contribute in ways that would fit their business and appeal to a wide variety of customers; some simply contributed 5 percent of total sales, while others opted to craft special menus specifically catered towards earthquake relief.
“People in New York are constantly dining out and enjoying our restaurants,” added New York Restaurant Association Executive Vice President Andrew Rigie. “Therefore, people could support the relief efforts by dining out as usual or, to show extra support, they could add an extra restaurant meal to their normal dining routine.”
One trend among both charitable organizations and business-related relief efforts was the implementation of the Internet and social networking sites, particularly Facebook. “Using Facebook was like getting free advertising. We could target food bloggers and food writers to get the word out,” adds Ichihara.
Across the country in San Francisco, designer Brooks Hassig used social media to organize a network of over 50 stores in ten countries, who for one day, would pledge a percentage of their sales towards the Japanese Red Cross. “Businesses see the opportunity to both support themselves, other socially conscious businesses, and most importantly do some serious good for the people of Japan,” said Hassig. He added that, “Our model allows businesses to join an ad hoc network, a pop-up team if you will, that support each other by showing support of a common goal, while also empowering themselves to energize their customers.”
RESILIENCY AND FRIENDSHIP
In the news media, the word most often used to describe Japan in the aftermath of the earthquake was “resilience.” For many, the matter of Japan’s recovery is not a matter of “if,” but a question of “when.” Predictions from economists, the World Bank, and the IMF have already projected that the Japanese economy could begin to rebound by the second half of 2011. When compared to the Hanshin earthquake, it has become clear that the Japanese government has taken the lessons from Kobe to heart. Where the government once shunned foreign aid, it has now embraced it with open arms.
However, as TEPCO races to contain the nuclear crisis at Fukushima, and the Kan Cabinet begins to formulate a reconstruction plan, it remains to be seen whether or not this cautious optimism will come to fruition. Yet regardless of what may lie ahead for Japan, actions taken by the U.S. government and its business community prove that ties between the two countries remain uniquely close.
“On a different level, seeing this outpouring of support from organizations here in the U.S. will certainly help to further strengthen the bond between our two countries,” said Karino. “The Japanese people will remember for years to come how Americans reached out to them during this time of need.”
