A Rising Sun

Story Highlights:

• Japan’s mid-March earthquake both impacted their national economy and dampened growth rates globally.
• May data are beginning to show signs of recovery—only two months after the disaster.
• Natural disasters (or other one-time events) tend to have too fleeting of an impact to derail a modern, developed economy for long.

When Japan was hit by the Great Tohuku earthquake and tsunami in mid-March, many speculated the disaster would have far-reaching consequences tipping the global economy into recession. Widely labeled a “black swan” event, some speculated the “fragile” global economy couldn’t withstand the shock to the third largest economy. But recently released May data are beginning to show Japan’s recovery.

While there was and is undoubtedly a severe local impact magnifying Japanese economic weakness extant prior to the disaster, the earthquake’s global influence was limited to slowing global growth rates—not causing worldwide contraction. Japan, a key link in the global supply chain, is the world’s dominant producer of several important semiconductor components (notably BT resin and calcium fluoride crystals), automobiles and components, lithium batteries and many more goods. The temporarily lost Japanese production has impacted US and global growth rates.

One could see this in myriad US economic data. For example, May 2011 US auto sales dipped to an annual pace of 11.8 million units, largely due to supply shortages that caused dealers to rein in incentives. Last week, Japan’s May trade data illustrated some of the earthquake’s continuing challenges—and how Japan is beginning to rebound.

May Japanese exports fell -10.3% y/y while imports rose +12.3%. Driving the weak exports? Transport equipment (comprised of autos, auto parts and more) and electronics exports fell -27% y/y and -17% y/y, respectively. That’s a pure example of supply chain impacts. And a significant driver of higher imports was a +33% y/y spike in liquefied natural gas (LNG)—a primary replacement fuel Japan is using to backfill lost nuclear capacity—which speaks to increased production and the fact power issues have largely been resolved. Also positively, the export decline decelerated from April.

Taking these modest improvements a step further was Wednesday’s May Japanese industrial production report, which showed output grew +5.7% in May—the fastest monthly pace in over 50 years. Output accelerated from April’s +1.6% growth and beat consensus expectations for +5.5%. (Interestingly, the consensus figure’s relative accuracy obscures wide dispersion in their forecasts: The high prediction was 7.2% and low 2.2%—a full 5% gap!*) And the northeastern prefectures directly hit by the disaster paced growth, logging an +18.8% monthly gain. Add to these points data showing Japan’s retail sales rose for the second straight month in May (+2.4% m/m), and it seems a recovery is beginning to take root.

It’s too early to say Japan’s out of the woods with their economic problems—after all, the Japanese economy wasn’t exactly going gangbusters before the earthquake. And it seems Prime Minister Naoto Kan’s days are numbered, adding to Japan’s long-standing game of political hot potato (they’ve had six leaders since 2006). But through it all—political gamesmanship, a nuclear incident, a massive tsunami and one of the largest recorded earthquakes ever—that Japan’s economy seems to have begun bouncing back only a few months later illustrates a key point: Natural disasters and other one-time events tend to have too fleeting and local an impact to derail a modern, developed economy for long.