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Japan’s effect on recovery a worry

Impact of fear is unpredictable; World’s markets respond with slide

By Megan Woolhouse
Globe Staff / March 16, 2011

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The cascading disaster in Japan is unlikely to have a long-term impact on the global economy and US recovery, despite the broad sell-off in the world’s stock markets yesterday, economists said.

But with the scale of the disaster steadily worsening with reports of explosions and radioactive contamination at nuclear power plants, that could change, said Nigel Gault, chief US economist at IHS Global Insight in Lexington.

“Nobody really knows how big the impacts are going to be,’’ Gault said. “You have this risk, and it may be getting bigger, of a major, major nuclear disaster in Japan and that has people scared. And if you’re scared, you sell stocks, even if it turns out the worst hasn’t happened.’’

Stocks plunged around the world, falling more than 10 percent in Tokyo en route to the worst two-day drop there since 1987, though the Nikkei started this morning up about 6 percent. Other Asian markets fell as much as nearly 3 percent. In European markets, stocks fell 1 to 3 percent. In New York, the Dow Jones industrial average plunged more than 200 points in morning trading, but rebounded to close at 11,855.42, down nearly 138 points, or just over 1 percent.

The broader Standard & Poor’s 500 index declined 14.52 points to 1,281.87. The technology heavy Nasdaq Composite declined 33.64 to 2,667.33.

Despite the sell-off, many economists expect the Japan disaster to have a limited impact on the global and US recoveries. With Japan’s focus on exports, it does not provide a large market for US and other nations, accounting, for example, for less than 5 percent of goods and services that US firms sell overseas, according to an analysis by IHS Global Insight.

The Federal Reserve, meanwhile, said the US economy appeared on a “firmer footing’’ while making no mention of Japan in the statement released after policy makers met in Washington yesterday.

But US consumers could feel short-term effects from disruptions in Japanese production of cellphone components, high-end semiconductors, and automobile parts. As several Japanese automakers, including Toyota, Honda, Subaru, and Nissan, halted production at many of their Japan plants, Massachusetts auto dealers worried that the interruption will ripple through the supply chain, and leave their inventories short.

Some Japanese automakers, including Nissan and Honda, manufacture as much as 80 percent of the cars for the US market in this country, but the disruptions in Japan could cause part shortages and divert US production to other markets, dealers said.

“It’s totally going to put production behind no matter what,’’ said Ernie Boch Jr., who sells Toyotas and Hondas through Boch Automotive and distributes Subarus through Subaru of New England. “We were lucky, the Subaru ship with the latest product for New England, they left an hour before the earthquake hit so I’m going to get my April deliveries, but I don’t know about May.’’

For those waiting for the new iPad, the wait could be even longer, analysts said. Japan produces 20 percent of the world’s semiconductors, including about 40 percent of the flash memory chips used in smartphones and tablet computers, according to IHS Global Insight.

Jim Handy, the principal analyst at Objective Analysis, a research firm in California’s Silicon Valley, said several semiconductor plants in southern Japan, hundreds of miles from the epicenter of the earthquake, have closed temporarily to make safety checks and adjustments to sensitive equipment. The closures could have a significant impact on the semiconductor production, Handy said: A power outage lasting .07 seconds earlier this year at a Toshiba plant reduced its production by 20 percent for two months.

“If .07 seconds does that, imagine what a three-hour plus power outage will do,’’ Handy said.

Chuck Mulloy, a spokesman for Intel Corp., the California semiconductor maker with a manufacturing plant in Hudson, said the company relies on hundreds of suppliers in Japan, but so far Intel’s distribution system appears to be operating. The Hudson plant is unaffected by the Japan disaster.

“We are continuing to monitor the situation,’’ Mulloy said. “Challenges remain in power supply and transportation.’’

While the extent of the nuclear disaster remains unclear, concerns that the crisis will tamp economic growth and reduce demand for oil sent crude prices falling. Crude fell to its lowest in two weeks, dropping just over $4 to $97.18 a barrel in New York.

Economist Jeffrey Frankel, a professor at Harvard’s John F. Kennedy School of Government who served on President Clinton’s Council of Economic Advisers, said Japan’s eventual recovery could increase US exports to the nation as it rebuilds.

He noted that disasters sometimes produce economic boosts, recalling a fire that destroyed thousands of homes in Oakland, including his parents’ home. The local economy, however, received a lift because homeowners were heavily insured and rebuilt.

The same might be true for Japan, he said, which has planned extensively for major catastrophes. “Given that they had the foresight to do that ahead of time, I think there will be a big move of money into Japan,’’ he said.

Globe reporters Erin Ailworth and D.C. Denison contributed to this report. Megan Woolhouse can be reached at mwoolhouse@globe.com.