Japan was hit by an earthquake of magnitude 8.9 on March 11. This massive earthquake led to major human tragedy in Japan killing more than 30000 people, leaving many injured, and many other still missing. The earthquake and the tsunami also struck nuclear installations in Fakushima Dai-chi power plant. Because of disruption in the power supply, the coolant cannot be supplied to the nuclear reactors in the required amount, which raises the risk of radiation leak. Already traces of radiations have been detected in some of the food items and the water in Tokyo, which is located 220 KM south of the Fakushima.

Impact on Japanese Economy - Since Japan meets about 30% of its energy from nuclear based power plant, power supply to most of the parts in the country has been affected leading to closure of many factories. There has also been widespread damage to the infrastructure because of which there has been supply disruptions of many of the critical raw material components. Most of the automakers including Toyota, Honda, and Nissan have closed their plants for the lack of raw materials, and the reduced power supply. Manufacturers of semiconductors, LCD displays, batteries etc have also shut down their plants for at least next 2-3 weeks. Some of the major ports of Japan have been affected by the crisis impacting both the exports and imports based industries in the country. According to one estimate, cost of reconstruction is expected to cross $300 Billion. Japan will find it difficult to fund this construction because of its high debt which is already 200% of its GDP. Also the country has witnessed lacklustre growth over last two decades, and this earthquake triggered crisis might further push Japanese economy in downward spiral.

Impact on World’s economy – Japan is the third largest economy in the World, after US and China. It is also the second largest buyer of US funds. Since Japan will need money to fund its reconstruction, it might cash in the US bonds. This will force US fed to buy these bonds, and which will induce liquidity crunch in the US market. Similarly Japanese investment firms have made lots of investment across world’s capital markets. The pullout of the Japanese fund might lead to fall in stock prices in these markets in short term. The other major impact of Japan’s earthquake will be on the crude oil. Since most of the nuclear power plants of Japan have went offline, Japan will depend more and more on crude oil to meet its energy needs. Japan has number of oil fired power plants, and to meet its energy needs, it might buy more oil from the world market. The crude oil prices, which were already on upward trend, will see a further spike as a result of this. The rise in crude oil prices will impact the world’s economy in short term. Japan is the major producer of many of the items including auto components, semiconductors, LCD displays etc. Disruptions to the production of these major items will lead to the supply chain disruptions of these items in the world market. This will delay the production of high end gadgets like smart phones, iPads, LCD TV, laptops etc and cars. This will make a dent in the manufacturers’ profit.

Impact on India economy – Indian stock market dropped by 0.8% on the news of Japanese earthquake. But the market recovered next day. Killer earthquake which hit Japan is expected to have a marginal impact on the Indian economy. Most direct impact will be the pull out of Japan’s investments in the Indian capital market. Japanese investment firms will draw money from the Indian market to fund the Japanese reconstruction. This will have a negative impact on the stock market in short term. Japanese have also made investment in number of important infrastructure projects in the country such as Delhi Metro, Delhi Mumbai corridor etc. These projects might see delay because of lack of availability of funds. Surge in the crude oil prices because of increased demand of oil in Japan will also impact the Indian economy which is already reeling under inflation. Automobile companies will be negatively affected by the crisis, since they depend on Japan for the supply of many of their critical auto components. Also because of increase in the value of Yen (as a result of lack of yen supply), there will be an increase in the cost of these auto components. Japan’s refinery capacities have also been affected by the quake. This will have positive effect on Indian petrochemical firms such as Reliance. Indian IT industry will be marginally impacted by the crisis, since most of the IT firms derive only 1-2% of their revenue from Japanese market. Only IT firm which has high exposure to Japan market is Nucleus Software Exports which derives 30% of its revenue from the country. Crisis will have a minor impact on Indian exports, since Japan accounts for less than 3% of total Indian exports. Thus the recent earthquakes which hit Japan will have marginal impact on Indian economy.