Aftershocks from Japan

NEW HAVEN – The devastation – both human and physical – from the earthquake and tsunami in Japan is unfathomable. It is impossible at this point to gauge the full extent of the damage with any degree of precision. But we can nonetheless begin to assess its potential spillover effects on the rest of Asia and other major economies around the world.

The narrow view of the catastrophe’s economic impact is that Japan doesn’t really matter anymore. After all, more than 20 years of unusually sluggish trend growth in Japanese output has sharply reduced its incremental impact on the broader global economy. The disaster may produce some disproportionate supply-chain effects in autos and information-technology product lines such as flash drives, but any such disruptions would tend to be transitory.

On the surface, the world’s two largest economies have little to fear. Japan accounts for only 5% of America’s exports and 8% of China’s. Under the worst-case outcome of a complete disruption to the Japanese economy, the direct repercussions on the United States and Chinese economies would be small – shaving no more than a few tenths of a percentage point off their annual growth rates.

Within the so-called G-10 developed economies, Australia has the largest direct exposure to Japan – the destination of about 19% of its total exports. The eurozone is at the opposite end of the spectrum, with Japan accounting for less than 2% of its exports.