Japan and the Economy: What You Need to Know
Do Americans need to be worried about the U.S. stock market and the economy based on what is happening in Japan?
Yes. But as troubling as the events are, they shouldn't be the cause for paralyzing concern.
Even though a lot of manufacturing is done in China, Japan is a major player in electronics. Isn't that a problem for the stocks of companies like Apple and their stocks?
Any company involved in electronics hardware — anything with a chip or a battery or a screen — should be concerned. As Johnny Evans notes in Computerworld's Apple Holic blog: "Japan makes more than 40 percent of the world's electronic components. Some of the world's largest suppliers of key materials are based in the disaster zone itself, where earthquake, tsunami and radiation leaks from the Fukushima Daiichi nuclear plant have wrecked lives and devastated infrastructure." Production of silicon wafers has stopped at important factories. Companies around the world rely on Sony, Panasonic and Sharp to produce batteries and screens.
We live in a just-in-time world where nobody, at any level of the supply chain — from factories to stores — likes to keep too much stuff on hand. That makes operations more efficient. But it also means that you're more susceptible to disruptions. So far we haven't seen shortages of LDC televisions at BestBuy and iPads are still flying off the shelves. (Apple's stock has been down a bit in recent days, in part due to concerns over supplies. But if companies find that they won't be able to get products in and out of Japan for several months, the problems could filter into the retail sector.)
What about other types of companies and their stocks?
They should be concerned, too. As the data from the Commerce Department show, Japan is the U.S.'s fourth-largest trading partner, behind Canada, Mexico and China. In January, U.S. companies exported $5 billion in goods and services to Japan, and the U.S. imported about $10 billion in goods and services from Japan. So it's no surprise that many U.S. companies with substantial operations in Japan are finding their stocks under pressure this week. (Our parent company, Yahoo!, for example, has a large ownership stake in Yahoo! Japan). Airlines that serve the lucrative U.S.-Japan routes, such as Delta, Continental and American Airlines, will likely lose some business as a result. In addition, as the State Department notes, "Japan is the third-largest market for U.S. agricultural exports," importing plenty of grains and soybeans. As a result, a sharp slowdown in Japan, or a sudden disruption in the flow of goods, would be bad news for America's farmers.
Aren't there some companies for which the troubles in Japan might be good news? If Toyota and Honda can't export cars to the U.S., doesn't that create opportunities for U.S. automakers?
In theory, yes. Americans are back in a car-buying mood. And with gas expensive, drivers are kicking the tires of more fuel-efficient cars. But if Toyota dealers can't keep the Prius in stock (even tough Toyota has factories in the U.S., the Prius is made in Japan), buyers might be likely to give Ford or GM cars a second look. (Here's a five-day chart of the stocks of Ford, GM, Toyota and Honda). But the globalization of the auto industry means that U.S. carmakers will likely suffer some from the events in Japan. As the New York Times noted, the transmission system used in the Chevrolet Volt is made in Japan.
One of the surprising results of this week has been that the Japanese yen has strengthened against the dollar. What does that mean for the United States?
As I explain in more detail in the below video, the yen's strengthening is one of the many unexpected outcomes of this event. In the short term, a rising yen makes American exports cheaper to Japanese buyers and Japanese exports more expensive for U.S. buyers. That could help reduce the U.S. trade deficit.
We've seen several days where stocks fell by more than a hundred points. Should we get used to more turbulent markets?
Volatility was on the rise — even before the tsunami. The VIX index, which measures stock market volatility, has spiked in the past few weeks. And uncertainty and instability, whether it is in the political systems of the Middle East, the bond markets of Europe, or in the tectonic plates of the Pacific Ocean, tend to spook investors. With the continuing turmoil in Libya, the continuing fiscal crises in Greece and Ireland, and the continuing humanitarian and nuclear crisis in Japan, the news flow is likely to be disquieting for the next several weeks. That means we should be prepared for bumpy days in the stock market, and aim to focus on long-term performance.
The U.S. economy, now in its seventh quarter of expansion, has generally been helped along by strong global growth. Could Japan's problems, combined with the instability we're seeing around the world, push the U.S. back into recession?
It's highly unlikely that Japan, by itself, could knock the U.S. off its current growth trajectory. True, the U.S. is reliant on part for global demand. Exports reached a record level in January. But despite all the volatility and concern, the expansion is intact. The data on employment, jobless claims and car sales has been generally positive. On Thursday, the Conference Board reported that its Leading Economic Index, which forecasts future activity, rose smartly in February. But headwinds are rising from $100-per-barrel gas and from higher inflation. The Federal Reserve reported today that industrial production slipped a bit in February. Macroeconomic Advisers, which constantly updates projections for growth, said on Thursday that the economy is growing at 2.5 percent in the current quarter. That's slower than expected, but nowhere near recession mode.
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