Nukes scare people. The before and after satellite photos of Friday’s earthquake in Japan showed over the weekend that the resulting tsunami had sheared off and washed away whole sections of the country’s economy. But it was the threat of a nuclear meltdown that sent global markets plunging Tuesday. US investors drove the Dow down nearly 300 points before it crawled back to close down 137.
The areas of greatest concern were: diminished global growth and a threat to the recovery resulting from a sudden drop in Japanese demand; the impact on U.S treasury bonds, of which Japan is the third largest holder; a downturn in the nuclear industry in which the US is a big player; supply chain disruption for products like semiconductors affecting US manufacturers like Apple and Hewlett Packard; and the overall effect on US imports and exports.
It is difficult to disaggregate elements of the Japanese economy from the rest of the world. But by and large it looks as if the markets everywhere overreacted Tuesday, including in the US. There are potential real effects from the Japanese crisis but the biggest sources of damage to the US economy seem to be offset either by the peculiarities of the Japanese economy or by global capacity to adjust to disruptions.
On the macro level, Japan represents roughly 5% of the US export market. A large drop in that country’s consumption would have a limited effect on U.S. export levels. Japan has not been contributing much to global growth, so a drop there will not necessarily slow the rest of the world.
Most of Japan’s treasury holdings are in the private sector, with companies, banks and pension funds doing the most buying and selling of US Treasury bonds. Insurance companies are expected to have to cash in holdings, but pension funds seeking yields may make up the difference as they seek safe haven in the US.
It is unclear what effect the nuclear meltdown will have on US players in that field but it’s unlikely to be good. GE quickly put out a statement saying less than 1% of its earnings comes from nuclear. But clearly it and other players will suffer as new precautions and slower approval of new plants ensues. Demand for US natural gas, which has been beaten down in price amid a glut of new sources, is likely to rise.
Japan’s electrical grid may be affected and several factories that supply semiconductors and other high-tech products said they expected to offline or operating at diminished levels for weeks or months. However, the US may be able to pick up some of that demand for itself.