How a nuclear meltdown matters to Malaysia

JUST days following the magnitude 9 earthquake off the coasts of Sendai sent a tsunami to the north-east coasts of Japan's main Honshu island, analysts have been calculating how much this will cost and how this will impact the country's economy.

Since the beginning of the week, various back-of-the-envelope estimates of what this will cost in terms of damage, cleanup, construction and ultimately, the impact to the Japanese economy have been tallied by experts and published by the media.

On the human cost, the official tally is now more than 6,000 dead and more than 10,000 missing along the devastated north east coasts of Honshu 240km north of Tokyo.

With the possibility of a nuclear meltdown, the stakes are higher too and the costs to the world's third-largest economy have escalated even as workers (at great personal danger) try to cool the reactors at the Fukushima power plant near Sendai.

By mid-week, these experts estimated that the direct impact to the economy may cost up to US$200bil while analysts at Morgan Stanley Research say in a March 15 report that there are no reliable estimates of the scale of damage, which may reach tens of trillions of yen.

They say spending is not just for public infrastructure (roads, bridges, ports, airports), but private capital stock (housing, factories,rolling stock, ships, machinery) must be replaced.

The rolling blackouts experienced by parts of the country will also impact economic activity as factories and oil refineries face shutdowns.

This is on top of concerns that Japan's ability to pay for the cleanup and reconstruction may temporarily put pressure on an economy that in the last quarter of 2010 contracted 1.3% year-on-year.

Surveys show that economists expect Japan's economy to rebound in the first-quarter of 2011 but to contract in the second-quarter before recovering as reconstruction gets under way.

While it is still unclear how this will impact the Japanese and global economies, the movement of the yen, which strengthened all week and only weakened on Friday after intervention, will be of great interest, especially for emerging Asian economies such as Malaysia where Japanese companies have been heavily invested since the early 1980s.

The implications are that the yen's strength comes amid speculation that Japanese companies are repatriating funds back home to pay for the damage and reconstruction.

Therefore, there is a possibility that there may be less to spend or to invest in countries where Japan have had a presence for decades, particularly in South-East Asia.

So with less money to go around, how will economies like Malaysia, which have set targets for private-sector investment over a 10-year period under the Economic Transformation Programme, fare?

CIMB Investment Bank Bhd head of economics Lee Heng Guie says in a report dated March 14 that Japan is Malaysia's third largest trading partner, accounting for 10.4% of total exports and 12.6% of imports.

Major export items included liquefied natural gas, electronics and electrical products, chemical and chemical products and palm oil and crude oil.

Crucially, last year Japan was the second largest foreign investor, accounting for 13.9% of total approved manufacturing investments in the country.

Lee says there may be a more visible impact on the services and tourism sectors as Japanese, who accounted for 1.7% of total tourist arrivals, may avoid travelling abroad given dampened consumer sentiment.

Likewise, Malaysians will refrain from travelling to Japan for fear of radiation leaks.

CIMB's research head Terence Wong says in another report that a 1% decline in Japan's GDP can shave 0.2 percentage points off Malaysia's GDP growth, which can be compensated by other trading partners and the internal growth engine.

“A full meltdown of Japan's nuclear plants will have a larger impact on Malaysia's production and exports of electronics-based products and commodities due to prolonged disruption of the supply chain and a delay in deliveries as a result of logistic glitches,” he says.

Wong says this will be compounded by the disruption or shortage of supplies,including intermediate goods from Japan as machinery and transport equipment make up 57.5% of total imports.

He says the biggest fears are the potential spread of the radiation to Malaysia's major trading partners, China (12.6% of total exports) and South Korea (3.8% of total) and a pullback in consumer spending and travelling.

Wong says this will reduce demand for Malaysia's goods and services, including those provided by the travel and hospitality sectors.

“Investment flows may be dampened in the short term by weak investor sentiment. Also, companies may conserve cash and the overseas units of Japanese companies may send money back home. However, over the longer term, we believe Asia, including Malaysia, may benefit from the diversion of production facilities from Japan as part of global supply chain risk management,” he points out.

Wong says in the worst-case scenario, a full meltdown of the nuclear plants will cut the house's baseline

GDP growth estimate of 5.5% for 2010 by a half to one percentage points via both direct and indirect trade and income effects.

“The impact will be felt more in the second to third quarters though we still expect the full-year growth to be in the positive trajectory,” he says.

As for the global economy, already beset by geopolitical uncertainties in important oil-producing regions which has triggered higher oil prices, the verdict is still out as to the impact.

Economists at Goldman Sachs Group Inc and JPMorgan Chase & Co are still optimistic, forecasting global GDP growth of 4.8% and 4.4% respectively but others are not so sure, pointing that high commodity prices will boost inflation thereby slowing recovery in the developed economies and curbing demand in emerging ones.

But for those right now struggling to survive in Sendai and surrounding areas as temperatures drop, none of this really matters.

For the plant workers at Fukushima, whose actions in coming days will determine how deep and wide-ranging an impact last week's catatrophe will be, the words of an unknown Roman poet of the early first century AD comes to mind: Facta ducis vivent, operosaque gloria rerum (The hero's deeds and hard-won fame shall live).

By FINTAN NG
fintan@thestar.com.my