How Japan’s Crisis could improve the Global Economy

Investors around the world have panicked following the massive crisis in Japan caused by an earthquake, made worse by a tsunami, and radiation leaks at nuclear power plants.

Apparently there are stories about how Japan’s disaster could weigh on the global economy. This may be true. But let me offer an unconventional point of view that Japan’s woes could be a boost for the global economy.

According to International Monetary Fund (IMF), In 2010 the global economy grew by 5% and is anticipated to grow by 4.4% and 4.5% in 2011 and 2012 respectively.

Very few analysts are of the opinion that the disaster will undo the 4+% rate of global growth expected this year, or that the setback that the Japanese economy may suffer will be anything but a temporary one.

Japan is one of the world’s economic engines however its importance is dropping. Japan is the world’s number 4 economy after the United States, China and The EU.

Japan Crisis

The earthquake and tsunami damaged airports, Ports, factories and roads, disrupting the consignment of goods in and out of the country. Four container ports of medium size on Japan’s northeast coast were harshly damaged that they are not expected to resume operations for months or even years.

Certain commodities are particularly vulnerable. Japan used up 500,000 ounces of platinum and 750,000 ounces of palladium in the new cars it built in 2010. Exportation of new Japanese cars could be delayed while the ports are straightened out, and Japan has lost 23% of its electrical power as its nuclear power plants have shut down. Demand for base metals, particularly zinc and nickel, could also take a knock.

Moreover, Japan Exports to Europe, United States and rest of the world the manufactured components which can be sold alone or used in other manufacturing. For example, Japan is a major supplier of flash memory chips, commonly used in portable electronics. Delays in shipping could impact big buyers such as Intel, the world’s biggest semiconductor company, and Texas Instruments.

Therefore it can be clear now how this could disrupt manufacturing around the world.

On the other hand

v  Japan is the third-largest consumer of oil in the world after United States and China (4.4 million barrels of oil per day). During this Crisis, Japan could use less oil which will result to low demand and therefore decrease in oil prices (first Law of Demand). Lower oil prices should help the economies of the rest of the world to accelerate, or at least put off the risk of a global recession caused by an oil shock.

v  Japan will have to rebuild which means they will be importing things like aluminum, copper, steel and nickel plus wood, paper, and food. Importation of these things will increase the demand and therefore lead to increase In prices which will be an advantageous for poor exploited countries which produce these materials.

v  Japan is the number 1 market for exports of U.S. corn (Japan bought nearly 15 million tons of U.S. corn in 2009-2010). In the short-term, livestock operations in Japan are going to suffer, and that will lower Japan’s corn demand. But in the intermediate-term, not only will those livestock producers come back online, but Japan is probably going to have to import more corn and other grains as it rehabilitates its swamped farmland and broken infrastructure.

v  Good news for natural gas: Japan has shut down 11 nuclear reactors with a total capacity of 9.7 gigawatts (the equivalent of 200,000 barrels of oil a day, or 4.5% of Japan’s consumption). Even if some of those reactors come online, I think nuclear power is dead in Japan for years to come. This should be a boost for natural gas, a commodity that has suffered from oversupply recently.

v  A deluge of easy money. Japan’s central bank decided to inject an enormous 26.5 trillion yen (about $324 billion) into its financial system in the first three days of this week, so as to provide stimulus and prop up the economy and financial system. Moreover it can be suggested that they are probably not done yet! All that cash has to go somewhere (increase spending) which may result to increase in commodity prices.

Where to Invest?

We have already seen bargain-hunting investors dive into Japanese stocks Wednesday, scooping up shares of beaten-down companies. It can be argued that they are not yet matured due to the fact that  the selling in Japan may not be over yet. Give me a few days when we don’t have more bad news on one of Japan’s nuclear power plants. Then maybe I will be ready to buy.

The Japanese are a tough, resilient, industrious people. We can be sure that not only can they bounce back from this, but also they can rebound strongly.  Remember 1995, Japan was hit by a devastating quake that killed more than 6,400 people, about 4,600 of them in the city of Kobe. Within 15 months of the quake, manufacturing in Japan returned to normal levels.

To be sure, one fly in the ointment is how Japan is going to finance all this reconstruction. The government is expected to spend at least $200 billion, and the Japanese government’s debt is already an alarming 225% of the country’s economic output.

But as long as governments can create paper and pass it off as money — and there’s no sign that’s going to end any time soon, Japan should be okay.

And you know what else should do well as Japan prints money to pay for its reconstruction? The money you CAN’T print (gold and silver). Apparently, investors in Japan are selling gold in a hurry. But the World Gold Council says that Japanese investors have been selling gold into the market for years. The real buying is elsewhere in the world, including China, India and the Middle East.

How to Invest

Pullbacks in gold, oil and other hard assets can be bought just wait for a bottom before you commit your cash. We are not there yet.

A more interesting way to play it is to wait for a bottom in the Japan iShares (EWJ), a broad basket of Japanese stocks, and then buy it.  This is how real investors will do.

Entrepreneurship and Economic Development

Entrepreneurship is the act of undertaking an initiative towards establishing an enterprise. Some argue there’s an obvious link between entrepreneurship and economic development. Arguably, One of the factors that contributes to economic development is the increase in number of employed people; entrepreneurship provides positions for employment for otherwise unemployed individuals thus increasing the Per Capita Income which in turn affects the economic development of a country. Moreover entrepreneurship increases the economic growth of a country in terms of GDP (Gross Domestic product) since it increases the value of output produced by a country. Hence Entrepreneurship leads to increase in jobs, industrial competitiveness and National output. However such an argument also suggests that High measured levels of entrepreneurship will thus translate directly into high levels of economic growth.

A lot of factors can lead to the economic development of a country such as climate, education, property rights, saving propensity, sports, etc. If entrepreneurship is added to the list; does it mean countries with similar economic development with have similar rate of entrepreneurial activity? However some developing countries such as Brazil and Mexico top the list with high rate of entrepreneurial activity compared to developed countries such as UK and the US. Perhaps high start-up rates in developing countries are perhaps less a sign of economic strength when compared to such rates in highly developed economies.

According to the World Economic Forum’s Global Competitiveness Report (GCR) three major factors are involved in economic growth; efficient division of labour, capital accumulation and technological advance. Concerning technology, factors involved are such as technology transfer (transfer from abroad), and technology innovation. Strong economies are those based on technological innovation, thus the entrepreneurship aspect can be noticed in such an attempt to analyse economic growth. However one could argue Is Technological entrepreneurship the only form of entrepreneurship that affects the economy?

Perhaps it’s the element of innovation that promotes economic growth. It is through exploiting economies of scale and scope can entrepreneurship promote economic growth. Hence may explain why some poor economies do not fully benefit from entrepreneurial activities.

Nature, source and character of entrepreneurship are also observed to be affected by the development of the economy. In the era of industrial revolution in the 19th century, entrepreneurs evolved out of necessity due to few available jobs people had to find means to self-employment. As the economy of a country developed, such lead to the decline of necessity-based factor in turn entrepreneurship evolved due to opportunity. Enterprises emerged since people saw opportunities for new products and new markets.

However, necessity entrepreneurship had less of an effect on economic development while opportunity entrepreneurship has a positive impact on economic growth. Being pushed to entrepreneurship out of necessity because of lack of jobs or unsatisfactory jobs could lead to under development rather that economic development. Although we may argue that both factors can be involved in establishing an enterprise, then the opportunity-necessity ratio should be more lenient towards opportunity, since opportunity ratio has a positive relationship with GDP per capita. Hence suggested that policies in developing countries should focus on strengthening General National Framework conditions and in developed economies policy should focus on strengthening the entrepreneurial framework conditions since the relationship between Entrepreneurship and economic development in developing countries is more likely negative while the relationship in developed countries is more likely positive.

Entrepreneurial framework conditions (characteristics within the existing business environment that influence the decision to start a business) comprise a company’s capacity to encourage start-ups, combined with provision of skills and motivation for those who wish to go into business themselves. General framework conditions comprise of strategies to strengthen Small and Medium Enterprises before focussing on entrepreneurial framework conditions; these policies are focused at firms not at individuals. These include financial assistance, management assistance, training and reducing regulatory burdens.

When attempting to link entrepreneurship to economic development; definition and scope of entrepreneurship is most important. If entrepreneurial activity is aimed for agricultural sector and at a small scale then it’s more likely to have no/ negative effect on the economy. In essence entrepreneurship in developing countries is more likely to result to negative effect on economy than entrepreneurship in developed countries. The ratio between opportunity and necessity entrepreneurship is a key indicator to economic development. Hence in conclusion, entrepreneurship is not always a driver towards economic development, furthermore the nature, source and character of entrepreneurship changes with the economy, so do economic policies.



REFERENCES:

Dejardin, M. 2000, "ENTREPRENEURSHIP AND ECONOMIC GROWTH: AN OBVIOUS CONJUNCTION?", , pp. 0-14.
Stel, A.V., Carree, M. & Thurik, R. 2004, The effect of entrepreneurship on national economic growth:An analysis using the GEM database, EIM Business and policy Research, Zoetermeer.
Zoltan, J.A. 2007, How is Entrepreneurship Good for Economic Growth?, American Institute for Economic Research (AIER), Massachuttes.