A Week Later, Crisis in Japan Still Reverberates

The economic impact of the disaster in Japan is still uncertain; Republicans propose a GSE plan very similar to Obama's; and the yen took a dive, as orchestrated by the Group of 7.

By Dees Stribling, Contributing Editor

The economic impact of the disaster in Japan is still as unclear as exactly what’s going on at Fukushima Daiichi now, but that isn’t keeping economists from making estimates–or taking a stab at estimates–of the total cost. Goldman Sachs, for instance, has said that the parts of the country directly affected by the disaster account for about 7 percent of the Japanese economy, and direct losses might amount to roughly $193 billion (¥16 trillion), or 3.3 percent of Japanese GDP.

But over the longer term, the reconstruction effort might offset much of that loss. Nomura now estimates that Japan’s GDP will grow 0.9 percent in 2011 despite the disaster, a revised figure down by only 40 basis points compared with pre-disaster estimates.

How will the crisis affect the American economy? Indirectly, for the most part. According to the U.S. Department of Commerce, exports to Japan from the United States represent 0.4 percent of U.S. GDP, so in the unlikely event that Japan quits buying goods from this country, the impact would not be large. A small drop in exports to Japan is more likely, while concurrently there’s an uptick in U.S. auto production to offset the inability of Japanese auto companies to sell cars in this country (there is already talk of a Priuses shortage, for instance).

Unless the nuclear situation changes suddenly for the worse, the wild card remains panic, not the disaster itself. It could be that Japanese, American and other markets have little to fear but fear itself in this case, as evidenced by the wide gyrations in equities markets across the world last week. A more lasting economic contagion is a possibility, if not necessarily a likelihood, in the equities markets. Panic has also shown itself in less predictable ways, such as the run in China on iodinized salt, which is incorrectly believed to ward of the effects of radiation that probably won’t reach China in any case.

House proposes GSE plan

Late last week, House Republicans floated their plan for tossing Fannie Mae and Freddic Mac in the dustbin of history, as House Republican Conference Chairman Jeb Hensarling of Texas re-introduced legislation toward that end. At the heart of the plan would be a winding down of the GSEs, mainly by increasing guarantee fees and ratcheting down the size of mortgages that Fannie and Freddie can guarantee. Also, their portfolios would shrink bit by bit.

If that sounds familiar, it’s because the plan has a fair amount in common with the Obama administration’s GSE winding-down plan released in February. The Republican plan envisions a five-year winding down, however, as opposed to the U.S. Treasury Department’s 10-year timeline.

For the time being, any timeline for sending the GSEs into the night is speculative. The housing market is still very much dependent on them, awaiting the time when adequate private mortgage funding returns. Other questions about the proposed extinction of the GSEs include whether they will take the 30-year, fixed-rate mortgage with them; whether affordable housing will continue to be a U.S. policy goal; and what mortgage underwriting standards would look like in a non-GSE world.

Group of 7 acts on yen

On Friday, the yen took a dive–as it was supposed to, after the central banks of the Group of 7 wealthiest nations took the unusual step of selling yen hand over fist, to keep a lid on speculation that had driven the currency skyward compared with the dollar. An elevated yen would be bad for the country’s recovery, as it crimps exports. But then the currency, still considered a safe-haven bet in an uncertain world, gained back some of its value to end at 80.58 yen to the dollar. The G-7 might sell more yen on Monday.

The price of oil, on the other hand, was up over the weekend, as French and U.S. warplanes struck Libyan targets. The price may or may not spike further as the situation in that country changes, depending on factors that are impossible to forecast–hence the unusual appropriateness of the “fog of war” as it applies to the movement of internationally traded commodities.

Wall Street ended last week’s roller coaster on an up note, with the Dow Jones Industrial Average gaining 83.93 points, or 0.71 percent. The S&P 500 was up 0.43 percent, while the Nasdaq advanced 0.29 percent.