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Monday, March 14, 2011

Impact of Japanese Earthquake to the Malaysian Economy

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.

7 comments:

hariyani said...

Prof,

I found this topic very interesting facts.It alert me not only think of the negative impact on our economics but it also have positive impact.Especially in the car manufacturing or related industries.
I also agreed with you that our government should do proper research and get public feedback if they want to have nuclear reactor.Looking at the potential of huge establishment and maintenance cost including the safety issues.
This disaster remind me also on the heavy flood in Australia where it cost them approximately about A$3B to A$5B for redevelopment of the infrastructures. Recently I have visited my customer in Pulau Indah. This company involved in manufacturing of recycle products. They do commercial plastics for road, agriculture land and building. Due to huge re-development of certain effected areas in Australia his company received substantial order from Australia.Unfortunately my customer unable to support the demand from Australia as this company have very limited machine capacity. They can only do shipment for 12000mts a week as compared to a demand of 60000mts per week.Despite of the great demand my customer did not wish to increase the price. Reason because for long term business strategies. Yes, I agreed this is one of the impact under the concept of cross elastic of demand.Indirectly it gives our country economic benefits.
Hariyani
807774

Raja Azlan said...

Prof,

From my humble opinion, the change of price of Japanese cars (e.g. Toyota) will definitely effects the demand of other car producers (e.g. Kia from Taiwan, Proton from Malaysia, BWW from Germany) as close substitute (cross elasticity of demand).

However, Japan has manufacturing plants all over the world which are manufacturing cars and parts for local market e.g. Toyota produced as CKDs. This, I think will not effects much on the quantity demanded for Toyota respectively in relation to the change of price of its closest substitute. So, how about Honda, can still be Toyota's close substitute?

Secondly, Malaysia has to think many times on having nuclear energy plant as what we learnt from Japanese worst experience this few days. You can imagine what will happen to our relatively small peninsular Malaysia if one of its future nuclear plant leaks?

Raja Azlan
UUM-Rezzen/808558

Carry Trader said...

Hi Prof,
BOJ has expaned the QE program to 10T Yen to aid the recovery. However I think it needs to be signficantly larger to have a meaningful impact.

Just want to get your view on how it would affect Japan with the Fed ending QE2 at the same time.

Intrinsic Value

WatieRashid said...

The earthquake & tsunami disaster that hit Japan noted that Malaysia car distributors/dealers for Japanese car models such as Toyota, Nissan, Honda, Mitsubishi, are also affected in terms of getting the supply of auto parts. Not only the japanese car model, but it also affected the supply for autoparts and engines of our national cars, which are mostly imported from Japan. As we know, Malaysia has almost 60% demand of these Japanese car models that being assembled here. However, it shows a slight reduction in Japanese car sales in Malaysia for that reason. In view of banking, being the financier for those japanese car model distributors/dealers, it also shows a slight reduction in terms of loan portfolio in such categories of cars.


-Shalawati Abd Rashid-
UUM-Rezzen_KL: 805682

Anonymous said...

Kesan daripada tsunami dan gempa bumi di Jepun, dan kebimbangan rakyat Malaysia akan kesan radiasi kepada manusia. Ekoran daripada loji nuclear fukumi yang meletup di dalam tragedi tsunami di Jepun, rakyat Malaysia kecoh dan cemas, jika radiasi yang bocor itu sampai ke Malaysia. Jom baca info ini untuk mengetahui kesan radiasi neklear kepada manusia:

INFO: KESAN RADIASI NUKLEAR KEPADA MANUSIA
Pendedahan radiasi berukuran 100 Rems akan merosakkan sistem peredaran darah menyebabkan sel limfosit darah akan berkurangan. Simptom awal selesema.
Pendedahan kepada radiasi berukuran 200 Rems ke atas menyebabkan keguguran rambut dengan cepat, kerosakan saluran usus yang mengakibatkan mual, muntah dan cirit-birit. Pada kekuatan ini, radiasi boleh menyebabkan kerosakan saluran peranakan.
Radiasi nuklear berukuran 1,000 hingga 5,000 Rems mengakibatkan kerosakan kepada pembuluh darah dan boleh menyebabkan jantung gagal berfungsi dan kematian.
Pendedahan langsung kepada radiasi berukuran lebih 5,000 Rems akan menyebabkan sel otak rosak, selain membunuh sel saraf dan merosakkan pembuluh darah dalam jantung.
Dalam jumlah tertentu, iodin radioaktif boleh merosakkan sebahagian atau seluruh bahagian kelenjar tiroid yang mengawal metabolisma (pengeluaran tenaga) manusia.
Menurut data kesan pengeboman bom atom di Nagasaki dan Hiroshima menunjukkan mangsa cuma bertahan selama 10 tahun dan berdepan risiko jangka panjang seperti leukemia dan barah limfoma.

sumber: berita harian

Terima kasih. 808559 Rezzen KL

nor irewan shah said...

Assalamualaikum,

Kejadian ini memberi satu pengajaran kepada kita prof, kita perlu bersyukur kerana kejadian ini tidak menimpa kepada diri kita dan negara kita. Walaubagaimanpun, kita perlu bersiap sedia untuk mengatasi bencana atau rintangan yang bakal melanda. Nor Irewan Shah Bin Ibrahim 808571

CT said...

Overall impact on Malaysian economy is not expected to cause any adjustments to GDP growth
projections. For temporary, the disruptions could impact companies supplying components to
Japanese industries affected by shutdowns but upon restarting production, Malaysian companies
may be the alternative suppliers to the affected industries. In the medium- to longer-term, Malaysia could benefit from reconstruction efforts and potential interruption of production facilities from Japanese part of global supply chain diversification.

Regards,
Siti Aishah Abdullah
805683