JAPAN AND THE GLOBAL ECONOMY

JAPAN’S QUAKE AND THE ECONOMY

It would be a mistake to argue the earthquake that hit Japan doesn't have big implications for the global economy.

R. Taggart Murphy

The Diplomat, March 24, 2011

Assessing the Economic Aftershocks of the March 11 earthquake, Stephen S. Roach warns us not to be complacent about the effects on the global economy.

After outlining a ‘narrow' view based on a declining global profile for the Japanese economy—a shrinking percentage of both global exports and GDP, a rising China, and an irreplaceable position in only a handful of critical upstream industrial components—Roach urges us not to accept the ‘superficial’ conclusions that might flow from this view: that Japan ‘doesn't really matter anymore’ and that disruptions to global economic activity from the quake and its aftermath will be ‘transitory’ and ‘small.’

Roach points out that this ‘narrow view misses the most critical consideration’—that this latest shock comes at a time of global economic fragility. In particular, with interest rates worldwide at historic lows, the usual levers of monetary policy—interest rate cuts—are no longer available to central bankers to pump up growth. And ‘outsize fiscal deficits’ suggest that fiscal stimulus may also be exhausted. That leaves policymakers with nothing but ‘untested’ and ‘unconventional’ measures such as the quantitative easing being implemented by the Federal Reserve—and, in the immediate wake of the earthquake, by the Bank of Japan.

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