Economic impact of Japan tragedies in Mexico

Published in Plaza de Armas (www.plazadearmas.com.mx), March 21^st 2011.

A lot has been said and written about the different misfortunes that Japan has been living in the last week. There is still a lot of uncertainty and nervousness about the economic implications of these tragedies, particularly regarding the nuclear crisis they are facing (at the closing of this column, authorities continued their efforts to control Fukushima nuclear plant).

In such an interconnected planet, and considering we are talking about the 3^rd economy in the world, it is impossible to think these events won’t have an impact in other countries, although it is still difficult to have a clear assessment of its magnitude. However, let’s analyze certain data that will let us identify the kind of consequences on different time horizons.

The immediate days after the earthquake, the investors in several countries showed distrust and fears, and this caused falls in different stock markets; however, by Thursday (a week later), Japan, United States, South Korea and China had their first day of profits. We can’t say that we already have a world stock-market stability, but investors in some countries begin to have an initial confidence in the containment efforts of the nuclear leak, in the actions of the Japanese Central Bank with the great money injection they made to the financial system, and they begin to identify certain “bargains” in some stocks due to the recent falls, and they have reactivated stock markets. In short, we can still expect several volatility days in the short term.

In a larger horizon, there are some events that will have repercussions in the following weeks and months. In the world, Japan is a key actor for the automotive, high-technology and precision-machinery industries; therefore, the temporary stops or production decreases that several plants have made (Sanyo, Toshiba, Toyota, Honda, Canon, Panasonic, etc.) due to energy shortages or other circumstances have already had effects in the international prices for some raw materials and components. Also, in a few weeks, there may be shortages in plants around the world, affecting the productive chains in these industries. For now, Mexico already began to have shortages in some components and some plants have announced a two-day closing. The biggest effects will begin to appear mainly in the following weeks, as these companies’ current inventories begin to run out.

On the longest horizon, for the following years, implications of this incident will be in the world strategies for energy generation.  The World Nuclear Association estimates that 14% of world energy is produced by nuclear reactors, and several countries see the nuclear path as a way to reduce carbon emissions. However, the discussion started in different countries about the continuity of these programs, as in Germany, Switzerland and Israel just to mention a few. Although there will be debate in many countries, the current declarations of the two main producers of electricity by nuclear reactors, United States and France, are in the sense of continuity. For Japan, the third producer, it is a theme with profound strategic implications. According to the intelligence firm Stratfor, Japan imports practically 100% of its oil, and that’s why nuclear energy gives them a source they can control internally for energy generation; if Japan decides to reduce or stop its nuclear energy program as a consequence of the different political and technical evaluations, this could limit the growth pace of the world’s third largest economic engine.

In general terms, the direct impact for Mexico would be relatively low due to the small participation Japan has in different economic fronts (Japan was the 0.9% of foreign direct investment in 2010, the 0.6% of exports and approximately the 0.3% of international tourism); evidently these parameters have a multiplying effect, but it is hard to estimate the its size. Japan has more influence on Mexico’s imports (5%). Surely the biggest impact will be in those economic sectors that have productive chains from and toward United States in the automotive and high-technology sectors, due to the intense commercial activity between Japan and United States and our strong industrial activity with the latest. Can there be any benefits? In the supply of all the materials and products needed for the reconstruction tasks the region will have.

It is important to monitor the development of these sectors; you should identify the way your organization participates within those productive chains, directly or indirectly, to prepare contingency plans. The next couple of months will be key ones to have a better estimate of the size of the impact of these events.