The indirect fallout of the events in Japan could be substantial for India…
22-Apr-2011 •Anindya Bera
Japan is going through one of the worst crises since World War II. The loss of property, assets, and human capital has been catastrophic.Rebuilding homes, factories, roads and bridges destroyed by the tsunami and the subsequent nuclear disaster could cost as much as $200 billion, making it the most expensive rebuilding exercise ever. In addition, the indirect cost will take a heavy toll on the Japanese economy.
The country is already hugely indebted: its debt to GDP ratio is 200 per cent compared to 90 per cent for the US and 45.3 per cent for India. So far the high level of debt hasn’t been a cause for concern since most of it is domestically held. But raising the cash required for the rebuilding exercise will put pressure on the Japanese government, while the Bank of Japan will have to usher in a conducive monetary policy. According to Matt Robinson, senior economist, Moody’s Analytics, “The natural disaster and the subsequent disruption of electricity production and industrial activities will send Japan back into recession.”
Even though Japan is not mineral rich , it is one of the world’s most sophisticated manufacturing hubs. According to CLSA Asia-Pacific Markets, it supplies one-fifth of the world’s semiconductors and 40 per cent of electronic components. Higher up the supply chain of speciality materials you go, higher is Japan’s dominance, say analysts at Bank of America Merrill Lynch. China and other Asian countries like Taiwan and Korea depend heavily on Japan for intermediate electronics goods.
Japan is also a major consumer of commodities like coking coal (24 per cent of global exports), LNG, iron ore, iron and steel, etc.
Impact on India
The total bilateral trade between India and Japan was around $10 billion (Rs45,000 crore, 2.2 per cent of India’s total trade) in 2009-10. It also accounts for around 4 per cent of foreign direct investment (FDI) in India. As the Reserve Bank of India (RBI) has rightly pointed out, it is too early to assess the impact of events in Japan on the Indian economy. Prima facie, the economic links between Japan and India are limited. But the indirect impact of events in Japan on India could be significant.
Impact on commodities: Japan is a significant buyer in world commodity markets. The contracts that Japanese companies enter into set the benchmark for coking coal prices around the world. In the near term raw materials prices could see some weakness as supplies earmarked for Japan get diverted to the spot market. But in the long run prices could harden as the catastrophe has knocked off-line considerable production capacity. The follow-on demand will put pressure on existing suppliers.
Impact on currency: The Japanese currency is one of the world’s most widely traded. Post-tsunami, there was talk of liquidating a portion of the US debt held by the Bank of Japan and repatriation of investments made by companies and investors to meet the cost of rebuilding.
The markets ran ahead of actual events and the Yen breached the psychological barrier of 80 to the dollar. Not only could this kind of spike make the rebuilding process more expensive, it could also make Japanese exports uncompetitive. As a result, there was a concerted move by the G7 countries to stem the demand for Yen by dumping $1billion worth of their Yen reserves. But the Yen is still trading at 80.93 to the dollar, up from 82 per dollar.
That the appreciating Yen is not good news for Indian companies can be seen from the way Maruti’s shares have performed. Maruti buys Yen all the year round to make royalty payments to Suzuki Japan. An appreciating Yen will mean that Maruti will have to spend more in rupees to buy the same amount of Yen. This will affect its bottomline.
Many Indian companies have borrowed in the Yen, since interest rates in Japan have been very low. According to data from the Ministry of Finance, 11.8 per cent (till September 2010) non-government debt is denominated in Yen. Companies with high Yen-denominated loans will have to provision more for their interest-payment obligations.