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Economic hurt of Japan crisis may be short-lived for world Disaster drives down oil prices; reconstruction could spur growth

Japan's earthquake and nuclear crisis have put pressure on the already fragile global economy, squeezed supplies of goods from computer chips to auto parts and raised fears of higher interest rates.

The disaster frightened financial markets in Tokyo and on Wall Street on Tuesday. Japan's Nikkei average lost 10 percent, and the Dow Jones industrials fell so quickly after the opening bell that the stock exchange invoked a special rule to reduce volatility.

Yet the damage to the U.S. and world economies is expected to be relatively moderate and short-lived. Oil prices are falling, helping drivers around the world. And the reconstruction expected along Japan's northeastern coast could even provide a jolt of economic growth.

A weaker Japanese economy could help ease global commodity prices because Japan is a major importer of fuel, agricultural products and other raw materials, said Mark Zandi, chief economist at Moody's Analytics. Oil prices fell more than $4 to $97.18 a barrel Tuesday because of expectations that quake damage will slow Japan's economy and reduce its demand for energy.

Even assuming a drastic scenario, Bank of America economist Ethan Harris estimates, the disaster would shave just 0.1 percentage point off global economic growth -- to 4.2 percent this year.

"Japan has not been an engine of global or Asian growth for some time," said Nariman Behravesh, chief economist at IHS Global Insight. "This means that the impact of much lower Japanese growth on the world economy will be probably limited and small."

Japan is only half as important to the world's economy as it was during its last major disaster, the 1995 Kobe earthquake. And the area hit hardest by Friday's quake accounts for about half as much economic output as the area damaged by the Kobe quake, the Organization for Economic Cooperation and Development estimates.

Japan proved resilient after the Kobe quake: Manufacturers returned to normal production levels within 15 months, according to the CLSA, Asia's leading independent brokerage and investment group. Four in every five shops were back open in a year and a half. All told, Japan's comeback defied warnings it would take a decade to rebuild.

Autos and auto parts make up more than one-third of U.S. imports from Japan. As a result, shutdowns of Japanese auto factories could disrupt production at U.S. plants owned by Japanese automakers.

At the same time, some U.S. auto parts makers could benefit if Japanese plants in the United States substitute U.S. parts for those they usually get from Japan, Behravesh said.

A big unknown is the impact of the disruptions to Japan's power supplies. Behravesh estimates about 10 percent of Japan's electricity generation could be off line for several months. That would disrupt steel, auto and other production.

Investors fear that Japan will struggle to finance reconstruction, which is expected to cost the government at least $200 billion. The Japanese government's debt is already an alarming 225 percent of the country's economic output.

For now, though, the latest quake, the resulting tsunami and the threat of contamination from a damaged nuclear plant have spooked financial markets. Investors are fretting about the effects on companies around the world. Japan, the world's third-largest economy, accounts for about 10 percent of U.S. exports.

The quake damaged roads, ports, airports and factories in Japan, disrupting the shipment of goods in and out. The disaster blindsided multinational companies that were bracing for trouble in their transportation lines on the other side of the world -- at the Suez Canal or elsewhere in the Middle East where protests are destabilizing countries from Bahrain to Libya, said Patrick Burnson, executive editor of Supply Chain Management Review.

It has shut down auto and auto parts factories. Analysts at Tong Yang Securities in South Korea "do not expect production to normalize any time soon" in Japan. Even plants that stay open may have to wait for parts to arrive, a problem made worse because so many factories follow just-in-time supply management and keep few parts on hand.

Car plants in Thailand could have a harder time getting steel, much of which is imported from Japan.

Japan is a major supplier of NAND flash memory chips, commonly used in portable electronics. Japan-based Toshiba Corp., a big maker of the chips, was among the technology companies that temporarily closed facilities.

Prices for the chips jumped 10 percent from before the earthquake to Monday and another 3 percent Tuesday, according to Jim Handy, a director at Objective Analysis.

The "wafers" that are key building blocks of computer chips are also made in Japan. A shortage could pinch big buyers such as Intel, the world's biggest semiconductor company, and Texas Instruments, though Barclays Capital believes Texas Instruments has enough in stock to get by. But supplies are lean for capacitors and other electronics used in cell phones, which are also made in Japan. Nokia Corp. relies heavily on Japan for those electronics.

Some analysts note that companies and consumers that now buy Japanese products can often find alternatives made elsewhere.

David Rea, an economist with Capital Economics in London, said, "You'll have Japan's competitors -- largely South Korea and Taiwan, who are in high-end manufacturing, and China as well -- come in and undercut Japanese businesses experiencing disruption from the earthquake."

If Japan's infrastructure doesn't get rebuilt quickly enough, Japanese companies may transfer production overseas to pick up the slack, Rea added.

The reconstruction of Japan's northeastern coast might also provide business opportunities for foreign countries. Malaysian timber, for instance, will likely be needed to rebuild homes and other buildings. IHS predicts that the quake will "ultimately boost" U.S. exports to Japan.

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