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Will the Japan quake shake the world?
Tue, 15 Mar Pre-Open

The triple tragedy of the earthquake, tsunami and nuclear disaster in Japan has been so huge that the Prime Minister labeled it 'Japan's darkest time' since World War II. Then, the US had dropped two nuclear bombs on the cities of Hiroshima and Nagasaki after Japan had attacked Pearl Harbour. That incident alone changed the way the country was run, its politics and its dealings with other countries.

The recent natural disaster has been catastrophic as well. Besides the mounting death toll, Japan is desperately trying to deal with the overheating of its nuclear reactors which if unsuccessful can cause serious radiation leaks. The timing of this tragedy also makes it very hard for the world's third largest economy. The country is struggling to shake off the crippling effects of recession and the debt that it has accumulated. Plus, interest rates are at an all time low and although the immediate reaction after the crisis was to inject more liquidity into the system, one is not sure whether it will really work.

The question is to what extent this disaster will affect the dynamics of the global economy. In the near term, because of the power outage, production is expected to dip. So will consumption. As such, the cost of commodities, such as crude oil, iron ore, copper and the like, will drop over the next few days and potentially the next few weeks. That said, in the medium to long term, the scenario is likely to be different. For starters, Japan will have to undergo massive reconstruction and when that process begins to take place, the demand for commodities is sure to rise.

On the oil front, it will be quite some time before the nuclear power plants start functioning normally once again. Which means that Japan will have to go in for more oil imports. The country is already the third largest importer of oil after the US and China. And the damage to the nuclear power plants means that the demand for oil will rise further. This could then be another catalyst that will keep oil prices at higher levels.

There is also the increasing possibility of recession in Japan prolonging as an aftermath. Monetary policies are likelier to remain benign. Only time will tell whether the repercussions on the global economy will be worse or better than what was originally envisaged.

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Feb 20, 2018 03:21 PM