After the initial shock of the Japanese triple tragedy (earthquake, tsunami, & ongoing nuclear) wore off and it’s reality set in, I began to ponder what if any long term economic implications might arise as a result. Commonwealth (my broker/dealer) recently issued a statement outlining their assessment of the situation which says the whole problem is “surmountable.” This is consistent with the “that which doesn’t kill you will make you stronger” ethos, however my apprehension isn’t so easily assuaged.
There will likely be supply shortages for products manufactured (or partially manufactured) in Japan and while this will be an inconvenience the bigger concerns are what Japan decides to do with it’s investments in the United States and the consequences of the nuclear situation. It’s not hard to imagine a scenario where the Japanese government reduces it’s foreign investments as a way of partially funding the massive cost of rebuilding. Even if they make a graceful (systematic and measured) exit the reduced demand for treasuries would result in increased borrowing costs for the US. With the amount of debt our country carries this additional interest expense would be immense and with our own economic challenges lingering (and on the horizon) repayment without dollar dilution and inflation is optimistic at best. The primary argument against this occurring is the amount of exports from Japan to the US and what they would do with the surplus dollars if not buying US treasury bonds. While this certainly sounds plausible, it may be another case of past experience not necessarily applying to the current (trade) situation.
Over the last decade, exports to the US have fallen by ~$51 billion annually despite a $217 billion increase in overall exports. “Our” economy now accounts for just 15% of Japan’s exports. Over that same time period China became a major importer of Japanese goods accounting for 19.4% of total exports, up from a mere 7.7% in 2001. China has become the lynch pin of global trade and yet the US only accounts for 5.8% of their exports (at least directly, these numbers to not account for items sent from China to other countries that ultimately make their way to the US).
The nuclear situation is by no means finished and may end up being a far bigger challenge than any economic “inconvenience” we’ll likely face…but I’ll save that for another post. I’m still ruminating on the investment possibilities and economic ramifications of the situation as it is (and continues to develop) but it’s clear that we (in the US) are more subject to the decisions of politicians in Japan and China than we realize.
Bloomberg is the source of the export numbers, view the full detail here.