I initially thought that the impact will be limited. Unfortunately, as the aftermath of the earthquake is getting from bad, then to worse, and now to even worse.

A few per cent of gross domestic product (GDP) of Japan will be knocked off in the quarters to come, no question about that (BNP Paribas thinks 10% or more can be knocked down). While most natural disasters only had short-term impacts on the economy and it usually bounced back quickly, this might not be the case as judged from the severity of the disaster. With the on-going nuclear crisis getting steadily worse, power supply has been cut off and rolling blackouts are now being scheduled. With widespread damages in production facilities of various companies and infrastructure, the hope of a quick bounce back now looks slim, and growth potential will be lower after the economy bottom-out. As Japan has very little natural resources (including oil and coal), the closure of nuclear plants will only mean more imports of oil and gas. BP’s figure shows that Japan’s oil and gas consumption each year accounted for about 5.1% and 3.0% of total world consumption, and all of them are imported (naturally). But the impact on the actual commodities prices will be hard to predict as the situation now suggests a more severe impact on the global economy than initially thought (and we should not forget that Japan is the third largest economy after the United States and China). The slowdown of global growth will mean downward pressure for commodities prices.

Trades will be disrupted in the quarters to come. Japan is the second largest importer of Chinese goods and services (after the United States), with about 8.5% of China’s exports went to Japan in February (alternatively, 22.6% of Japan’s imports came from China in January). Also, Japan’s share of China’s imports is the largest among all countries, with 12.3% of all imports coming from Japan in February (alternatively, 18.7% of Japan’s export went to China in January). The collapse in bilateral trade will have negative impact on China, at least in short-term. There is also a broader implication to Asia as a whole. In 2009, 37% of Japan’s exports went to Asia ex. China, and 23% of imports were from other Asian countries ex. China. The more-than-serious disruption in Japan’s economy and the expected long-road to recovery means a more sustained downward pressure on Japanese trades with other Asian countries, thus economic growth in Asia, which is now the key driver of global growth, can only be revised down in short-term.

The huge destruction of Japan will also mean the need for massive investments into infrastructure to rebuild the country. With big private sector savings (and large corporate savings), private sector investments to rebuild the capital stocks will give the economy some boost. Infrastructure will require investments from the government. Unfortunately, the Japanese government is hugely in debt, with its gross debt stands at double of its GDP. Although most Japanese government debts are held by Japanese (mainly Japanese companies), the government will find it harder to raise money to finance rebuilding as both the private and public sector use the savings to invest. Another related point is that Japan has been making huge investments in other countries, particularly in Asia. For instance, Japan is currently the third largest FDI equity investor in India in the latest financial year. Japan’s outward foreign direct investments to Asia amounted to US$20.6 billion in 2009, which accounted for 28% of total outward foreign direct investments. As the need for funds is now arguably larger back home, the slowdown of foreign investment will have a slightly negative impact on other Asian economies.

Many Asian economies have seen monetary tightening in the past few months as they fight with inflation. Some slight slowdown has been seen in China, and home prices in China are under pressure after series of tightening. I expect the pace of tightening from various Asian countries to moderate as government and central banks will need more time to assess the impact of the collapse in trade and possible decrease of investments from Japan.

On the whole, this is a much more negative assessment of the situation.