In this global economy, we are affected by events across the world. We've seen examples of turmoil in the Middle East affected to the price of petrol; climate change in Vietnam, Thailand and India on price of rice and other food products, bird flu epidemics on tourism sectors; and problems of Financial Institution in European Countries and United States on export and import of our manufacturing products. The 8.9 magnitude earthquakes and resultant tsunami that hit Japan near the city of Sendai on Friday, March 11, 2011 could also have an impact on Malaysia economy. The tsunami, a Japanese word meaning "harbor wave", surged through towns and cities, bulldozing everything in its path. A large freight ship was sitting bizarrely in the streets. A wrecked airplane lay nose-deep in the rubble of homes in the port of Sendai. Cars were piled atop one another, train carriages tossed carelessly aside. About 10,000 people were feared killed by the earthquake, and as many as 20,820 buildings were either destroyed or badly damaged. The death toll could go higher.
What are the impacts of earthquakes and resultant tsunami on Malaysia Economy? I think that with the manufacturers’ and businesses disrupted in Japan, we can expects that Korea, United States, Europe and even Malaysia cars manufacturing industry like Kia, Hyundai, Ford, General Motors, Volvo, Peugeot, Renault, and even Proton could see short term benefits. Nonetheless, the area of where the quake hit, the nature of Japan's economy coupled with the economics of natural disasters is likely to mean that despite the physical damage, the financial impact of Friday's earthquake will be minimal in Japan, and indeed in the rest of the world. Here's why:
First of all, the good news is that the quake hit in a Northern part of Japan that is not very populated. The area around Sendai, which was the city closest to the quake, is mostly agricultural land, even from the You Tube we can see also port and airport from this disaster areas. Sendai also has some factories there, including a number that make car parts for Toyota and Nissan. Still, analysts estimate that the area that was effected accounts for less than 2% of the Japanese economy overall. Of course, like in the case of Toyota, Nissan and other car manufacturing, one plant shutting down could have ripple effects on other plants that use those parts. One interesting sidebar to the economic impact of the quake was that the success that Japan has had with "just in time manufacturing" (remember important of new management technique and process innovation) could come back to haunt the country, especially if it finds itself with few inventories, and problems with transporting goods.
Another factor in Japan's favor is that, unlike the United States, it exports more than it imports. That means much of the demand for Japanese goods comes from outside the country. And there is no reason to believe demand from other countries would drop because of the earthquake, only then factories in Japan cannot fully fulfilled demand from their importers. With the problems in the supply of electricity in Japan because the explosion and radioactive leakage at the Fukushima Daiichi nuclear power plant, the situation of limited supply of electricity will affect the industry. This incident also gives a good reason why Malaysia should think carefully with the intention of building our own nuclear power plants. Nuclear power plants facility was vulnerable to earthquake, tsunami and floods, means it was not easy to maintain the safety of such facility. The public demands nothing less than perfection from the nuclear industry in terms of safety. Fear of radiation is deep-seated in our mind with this nuclear technology.
Lastly, confidence is a major driver of economic activity. When consumers and companies get nervous they spend less and that can cause recessions. But earthquakes tend not to cause big hits to consumer confidence. That's because earthquakes are specific events and the scope of the damage is usually known pretty quickly, if not the eventual cost. Bird flu epidemic for instance, caused much more economic damage than say the Indonesian Tsunami, because the fear of the disease caused months of stalled travel and uncertainty. People just didn't know what they were dealing with.
The earthquake and tsunami in Japan could also negatively impact on the country's economy while exacerbating the country's ballooning public debt issues, as spending by the Tokyo government will spike to carry out emergency response measures. For the rest of the world, the economic impact looks modest as well. Petroleum price actually fell on the news of the quake. That's because Japan makes very little petroleum, but is a big importer. If the economy weakens, that would mean less demand for petroleum from Japan, which would be good for the Malaysia. Rising oil prices have been a growing worry for the Malaysia economy. However, we have to remember that we also depending on export from petroleum, and PETRONAS contribute a lot to Malaysian Economy. With petroleum price, fall, then the price of rubber also fall, that why if look at the market today, the price of rubber fall from RM8 per kg to only around RM4 per kg. We can apply the concepts of Cross-elasticity of demand with the impact of changes in petroleum price on the price of rubber products.