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The Economic and Energy Policy Fallout of the Japanese Earthquake for SE Asia

The Economic and Energy Policy Fallout of the Japanese Earthquake for SE Asia

The world’s shock at the loss of life and destruction to property in NE Japan was soon eclipsed by the worry associated with the possibility of an impending nuclear disaster.  While the global community feels for the double whammy that struck Japan and is rallying around the nation, concerns about the short and long-term effects of the earthquake are not geographically constrained. Despite China recently overtaking Japan as the world’s second-largest economy, Japan remains the largest investor, exporter, importer, and public financer for most SE Asian countries.  In today’s times of global economic interdependence where every event has a ripple effect, the earthquake and tsunami’s impact on the Japanese economy are understandably a cause for anxiety in the nations of SE Asia.

Japan is the largest exporter (tied with China) to and importer (tied with USA) of ASEAN goods and services.  Therefore, the likelihood of the damage to Japan’s economy spilling over into SE Asian countries is high.  For example, both Thailand and Indonesia’s auto industries rely heavily on Japanese manufactured electronic parts and a shortage of supply could stall these industries.  As the Asia Times reported, electronic and computer parts manufacturers, such as Toshiba and Fujitsu, have already closed and leading consumer electronic giants including Sony, Nikon and Panasonic are suspending production due to delays caused by black outs.  The Japanese just-in-time manufacturing method means that excess inventory is low and the manufacture of products that rely on Japanese electronics cannot be sustained for long if their factories remain shut. Hence, there are legitimate fears about a sustained disruption to international supply chains.

In addition to being a trade giant, Japan is also the biggest donor in the area. It is the largest shareholder (along with the USA) in the Asian Development Bank (ADB), an institution that not only provides loans for infrastructural development (a role similar to the World Bank), but also often plays the role of the IMF by providing stand-by credit facilities (e.g. Indonesia) and hard-currency FX reserves (e.g. Vietnam) to countries in the region. Therefore, the concern about a shortage of emergency and development funding in SE Asia is valid as Japanese resources turn homeward for rebuilding efforts.

The most important impact of the earthquake is likely to be on fuel supply to meet energy demand in Japan. The damaged nuclear reactors met about 30% of the nation’s energy needs. In the absence of this power there have been sustained blackouts that are affecting industry and civilians alike.  Japan will probably need to plug this gap with natural gas and coal in the short-term. And it is likely that the adverse health impact will cause the nation to also rethink its use of nuclear energy in the long run.  This reassessment may be necessary for all countries in the region prone to tsunamis. In the past, Vietnam, Thailand and Indonesia had announced plans to build nuclear plants in the coming decades. Thailand has already put its nuclear plans on hold after the Japanese disaster and Vietnam and Indonesia may well follow suit.

The economic effect on SE Asia from the recent events in Japan seems daunting. However, there is a silver lining.  As Japan focuses funds inwards for reconstruction, traditional Keynesian economics suggests that this will accelerate growth within the country and might be just the impetus needed to jolt the economy out of its prolonged recession. This spending by Japan will increase demand for raw materials from the ASEAN. Learning from this incident, Thailand and Indonesia will probably consider diversification of their supply chains in the long-term, a strategy that should also help poorer nations in SE Asia.  Additionally, since Japan is constrained in its energy options, it will turn to Thailand and Indonesia’s energy companies for supply of natural gas and coal in lieu of nuclear energy leading to large profits for suppliers in the short-term. Whether the Japanese embrace this as a long-term shift remains to be seen.

Therefore, while the economic impact of the Japanese earthquake on SE Asia will be somewhat severe in the short run, the long-term impact should be balanced by some of the sources of increased spending and cooperation identified above. On the energy front, the immediate effect of the earthquake will be a scaling back of nuclear energy projects but there will hopefully be a positive long run effect on energy policy in the region. SE Asia is experiencing rapid growth and a correspondingly high demand for energy. Nuclear power may be the only answer to energy needs of the region. It offers reliability, security (reduced dependence on imports of coal and natural gas), and limited carbon-dioxide emissions (emitted only in building and supplying the plants). A recent article in the Economist indicates that nuclear energy also has a reasonably good record in terms of death toll when compared to the 2,000 to 3,000 workers killed annually in China’s coal mines.  However, this of course requires stringent safety standards and well maintained plants.  Hopefully, the incidents of the past few weeks will not completely deter SE Asian countries from considering the nuclear energy option but rather help inform better safety standards and shame nuclear energy companies into implementing necessary improvements to plants.

Rubaab Bhangu is a Climate & Energy Policy Analyst at ICF International in Washington DC.