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Impact of quake on Japan’s growth likely to be ‘temporary’; ‘Limited impact’ on strong regional economy, says World Bank East Asia and Pacific Economic Update

March 20, 2011

Singapore, March 21, 2011 –Japan’s real GDP growth will slow, but the slowdown will likely be temporary, as a result of the earthquake and tsunami and growth should start picking up after mid-2011 as reconstruction efforts get underway, says the World Bank in its latest East Asia and Pacific Economic Update released today. While it is still too early for a full assessment, Japan’s past experience suggests an accelerated reconstruction effort, and the short term impact on the economies of developing East Asia is likely to be limited.

The report, titled Securing the Present, Shaping the Future, was finalized in the weeks prior to the disaster in Japan. In new research prepared since the quake and tsunami struck Japan, the World Bank provides preliminary analysis on the implications for the region with a focus on trade and finance. However, the analysis points to uncertainties and ongoing challenges posed by the unfolding situation involving nuclear reactors in Japan.

"Clearly given Japan's importance in East Asia, the tragic events unfolding will be felt in the region. But it's far too early to give an accurate assessment of the likely damages,” said Vikram Nehru, World Bank Chief Economist for the East Asia and Pacific region. "At this stage, we expect the economic impact of this disaster on the East Asian region to be fairly short-lived. In the immediate future the biggest impact will be in terms of trade and finance. We expect growth in Japan will pick up as reconstruction efforts accelerate."

On trade, if the Kobe earthquake of 1995 is to serve as a historical guide, Japan’s trade slowed only for a few quarters; Japanese imports recovered fully within a year and exports rebounded to 85 percent of pre-quake levels. But this time around, disruption to production networks, especially in automotive and electronics industries, could continue to pose problems.

On finance, about one-fourth of East Asia’s long-term debt is denominated in yen, ranging from about 8 percent in China to about 60 percent in Thailand. A one percent appreciation in the Japanese yen would translate into about a $250 million increase in annual debt servicing on yen-denominated liabilities held by East Asia’s developing nations.

Looking back on 2010, the report characterizes the region’s output growth as surprisingly strong, with real GDP growth amounting to 9.6 percent for the year as a whole. Growth was also broad-based: six countries in developing East Asia grew by 7 percent or more in 2010. This is largely the result of sustained monetary and fiscal stimulus measures and stronger growth in demand abroad. Real GDP growth is projected to settle to about 8 percent in 2011 and 2012.

The outcome in 2011 is likely to be more subdued as fighting inflation becomes a short-term priority. Lowering inflation presents particularly difficult policy choices for middle-income countries in East Asia, where the application of monetary policy has been complicated by a surge in portfolio capital inflows and rapidly increasing food and commodity prices. The bulk of the adjustment burden will likely rest on fiscal policy, where the challenge lies in lowering deficits more rapidly while creating the fiscal space to finance critically needed infrastructure and assure necessary social investments and cash transfers to the poor.

The report also examines the region’s outlook in the medium to long term, asking whether it can harness opportunities and tackle challenges to proceed on a path of rapid and sustained growth. The earthquake and tsunami in Japan serve as a stark reminder of one of East Asia’s greatest challenges – its vulnerability to natural disasters. The region covers half of the earth’s surface, is home to 59% of the world’s population, but has had over 70% of the world’s natural disasters. East Asia’s urban centers, increasingly where output and population are concentrated, are under threat of extreme weather, rising sea levels and other hazards. Countries must work to build innovative and disaster resilient cities, ensure environmental sustainability, and adapt to the effects of climate change.

With the world’s economic center of gravity shifting gradually toward East Asia, the region must also assume new responsibilities, contributing more toward global public goods. “East Asia can continue to grow rapidly if it is willing to make the tough decisions needed to ensure macroeconomic stability in a volatile global economic environment. At the same time, it must address medium term challenges such as accelerating regional economic integration, reducing economic and social inequalities, and lowering the carbon intensity of production and consumption,” emphasized Vikram Nehru.

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