Economic Aftershocks: März 2011

März 2011

Assessing the Economic Aftershocks of Japan's March 11 Earthquake

R. Taggart Murphy

Assessing the Economic Aftershocks of Japan's March 11 Earthquake Stephen S. Roach warns us not to be complacent about the effects of the March 11 earthquake in Japan 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 any more" and that disruptions to global economic activity from the March 11 earthquake 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 policy makers 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. Murphy assesses the Roach perspective on Japan's economic crisis.

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