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Wednesday, March 16, 2011

Tokyo woes pose multiple challenges for KL

Malaysia's economy may face multiple challenges from the earthquake and tsunami disaster that struck Japan, the world's third largest economy last Friday, economists say.

They said the potential disruption to the country's trade with Japan will depend on the extent to which the latter's manufacturing production capacity and supply chain are incapacitated by the earthquake, amount of exports and imports originating from the affected areas and speed of reconstruction.

Last year, Malaysia's exports to Japan amounted to RM66.3 billion or 10.4 per cent of its total exports, while imports from Japan totalled RM66.5 billion or 12.6 per cent of Malaysia's total imports.

"We could see an increase in Malaysia's exports to Japan given the need for building materials and other inputs for reconstruction," said RAM Holdings chief economist Dr Yeah Kim Leng.

He said that during the Kobe earthquake in January 1995, Malaysia's exports to Japan rose by 26.4 per cent that year and 12.5 per cent in the following year, both higher than the rise in total exports of 20.2 per cent and 6.2 per cent in 1995 and 1996, respectively.

Dr Yeah said the post-1995 Kobe reconstruction efforts had been estimated to cost US$100 billion (RM304 billion) and this had been cited as one of the causes of Japan's decade-long anaemic growth.

"However, relative to the current size of the Japanese economy, the cost amounts to only 2 per cent of its current gross domestic product," he said, noting that as a high-income country, Japan is in a better position to recover from the tragedy.

Dr Yeah said the impact on the Malaysian economy is likely to be muted given that the rebuilding in Japan will require substantial imports.

He said concern, however, is on the demand multiplier whereby a slowdown in Japan could result in a loss of engine power for the global economy and for the region, culminating in a downward revision of growth outlook for the region.

"We anticipate lower inflows into Malaysia and possibly higher repatriation as substantial capital is needed for the post-quake rehabilitation," he said.In 2010, Japanese foreign direct investments amounted to RM9.7 billion, while outflow from Japanese firms totalled RM6.9 billion, yielding a net inflow of close to RM3 billion.

Universiti Utara Malaysia economic and agribusiness associate professor Dr Jamal Ali said despite the physical damage, the financial impact of the earthquake will be minimal in Japan, and to the rest of the world.

He said the good news is that the quake hit a northern part of Japan that is not very populated as the area around Sendai, city closest to the quake, is mostly agricultural land.

However, Dr Jamal noted that Sendai does have factories, including a number that make parts for Toyota and Nissan.

"Of course, like in the case of Toyota, Nissan and other car manufacturers, one plant shutting down could have ripple effects on other plants that use those parts," he said.

Dr Jamal said another factor in Japan's favour is that it exports more than it imports. That means much of the demand for Japanese goods comes from outside the country.

He said for the rest of the world, the economic impact looks modest.

Petroleum price fell on the news of the quake because Japan produces very little petroleum, but is a big importer, he noted. Dr Jamal said if the economy weakens, it would mean less demand for petroleum from Japan, which would be good for Malaysia.

"Rising oil prices have been a growing worry for the Malaysian economy. However, we have to remember that we are depending on petroleum exports, and Petronas contributes a lot to the country's economy," he said, noting that with the petroleum price falling, the price of rubber will also fall.

By Azlan Abu Bakar
New Straits Times (Business Times: Tuesday, March 15, 2011)

(Thanks Mr Azlan Abu Bakar for discussing about this issue with me)


hariyani said...

Prof Jamal,

The key points that you and Dr Yeah highlights have give a very good business consideration to the industry player. The opportunity that Malaysian can gain in term of economic development.
Kudos to both of you!!
Hariyani 807774

Raja Azlan said...

Dear Prof Jamal,

This will be a great case study and a better insight for a very practical situation. Now I can see how Japan is always ready all the way to become a strong high-income country thus by going for more exports than imports do play an important role for Japan’s faster recovery of its economy.

Best if you explain this in this week's class for whole class understanding. Probably you can explain how Japan applies their strategy of being a small petroleum producer but acting as big importer as well. How does it work Prof? In addition, perhaps you can update us what are other Japanese strategies in place currently for their long-term sustainability?

Raja Azlan (King)

Linda Sabri said...

Assalamulaikum Prof,

Saya tertarik dengan kenyataan Prof mengenai penurunan harga petroleum juga akan menyebabkan penurunan harga getah. Seterusnya ini mengingatkan saya tentang ‘cross elasticity of demand’ iaitu kesan ke atas produk pelengkap atau ‘complementary product’ ke atas permintaan.

Linda Sabri