Economic and market fallout to be contained

Ten days after Japan's catastrophic earthquake and tsunami investors are still trying to work out the likely medium-term effects on Japan's economy, the wider region, and Asia's financial markets.

With hopes rising that engineers may finally be getting close to stabilising the damaged Fukushima Dai-ichi nuclear plant, analysts are feeling a shade more confident about trying to quantify the impact of the triple disaster. And while no one is playing down the scale of the human tragedy, many are thankful that the economic damage does not appear to be worse.

The main yardstick for assessing the probable costs is still the earthquake that struck the port city of Kobe in 1995, inflicting around 10 trillion yen-worth of damage. On the grounds that the latest quake has affected both a larger proportion of Japan's population and a greater share of the country's productive capacity, economists at Goldman Sachs estimate that the damage inflicted on buildings and infrastructure by this month's disaster may add up to around 16 trillion yen (HK$1.5 trillion) equal to 3.3 per cent of Japan's gross domestic product.

That sounds a lot, but a simple assessment of the damage to assets will tend to overstate the impact on economic activity.

Michael Taylor at Lombard Street Research points out that the four affected prefectures account for only around 7 per cent of Japan's industrial production. Assuming that factory output from the affected area drops by a quarter this month, then Japan's industrial production for March will fall by just 2 per cent.

In reality the impact will be greater because of disruptions to Japan's electricity supply. But assuming that normal power supplies are largely restored to industry by the end of April, economic growth will only be reduced by around half a percentage point this year. Given that analysts were expecting the economy to grow by between 1 and 1.5 per cent over 2011, unless power cuts stretch well into the second half, it is likely that Japan will be able to avoid an economic contraction this year, despite the extent of the devastation.