"Economists are pessimists: they've predicted 8 of the last 3 depressions."
--Barry Asmus

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Tuesday, March 15, 2011

The Potential Economic Impact of Japan

The current series of disasters in Japan make it easy to grasp, intuitively, why the markets are so concerned about what has happened.  However, it is not just the human cost that is driving market concerns.  Japan wields considerable economic might and, if it is crippled, the impact will be felt around the globe.  Here are some facts, to help put that impact in perspective:
  • Japan has the fourth largest economy on Earth, with GDP in terms of purchasing power parity[1] is  $4.338 trillion.  The United States, by way of comparison, is number two (GDP is $14.83 trillion, using the same calculations).
  • Public debt[2] is at 225.8% of GDP.  The US, for all our concerns about public debt, is currently at 58.9% of GDP.
  • Japan owns, as of January 2011, $885.9 billion in US Treasury Securities, meaning they hold about 10% of the US public debt.
  • Growth rate of industrial production was at 15.5%, giving them the third fastest growth rate in the world.
  • They imported $636.8 billion in 2010, making them the fifth largest importer in the world.  10.96% of their imports come from the United States.  Most of those exports are transportation equipment, motor vehicles, semiconductors, electrical machinery, and chemicals.
  • They exported $765.2 billion in 2010, making them the fifth largest exporter in the world.  16.42% of their exports go to the United States.
  • Their population is about 126.5 million people, making them the tenth most populous nation on Earth.
Not to belabor the data, but consider the impact of a substantial cut in Japanese exports or imports (or both).  Or of Japan defaulting on some of their public debt.  Or of Japan being unable or unwilling to purchase additional US debt.  Now, given their position as the fourth largest economy on the planet, and as the fifth largest importer and exporter on the planet, imagine how many other nations are considering similar problems.
That, in a nutshell, is why the markets are terrified about the potential impact of these natural disasters on Japan.
[1]  GDP in terms of purchasing power parity is a nation's GDP calculated using prices prevailing in the United States.  Economists like this method because it is an attempt to do apples to apples comparison.
[2]  Public debt is government debt owned by non-government domestic institutions plus government debt owned by foreign entities minus government debt repayments . 

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