Will global economy be hit by Japan?

By Chris Isidore, senior writer


NEW YORK (CNNMoney) -- Japan is at serious risk of falling into a recession due to Friday's tragic earthquake and tsunami, according to many leading economists. But Japan could recover quickly, sparing the global economy a significant shock.

The earthquake and tsunami is confirmed to have killed nearly 2,000 people and put several of the nation's nuclear power reactors at risk of a meltdown, leaving many without power and nearly a half-million people in shelters.

While most of the industrial base of Japan was spared the worst of the disaster, few plants are back up and running yet as the country tries to come to grips with the crisis.

"The recent events in Japan are first and foremost a human tragedy," said economists from Capital Economics in a note Monday. "Nonetheless, the markets also need to consider the economic impact."

Here are the 3 key questions in trying to judge the economic chaos caused by the disaster.

How bad will Japanese businesses be hit? Even in areas not directly damaged by the quake and flooding, many factories remain closed due to damage to roads and rails, disruptions of supply chains and limits on the supply of electricity.

The nation's major exporters, including its three largest automakers, Toyota Motor (TM), Honda Motor (HMC) and Nissan (NSANY), as well as electronics giant Sony (SNE), shut most of their Japanese factories Monday. Some facilities will stay closed the rest of the week, even if there is no physical damage, due to limits on electrical power.

"A good part of the country looks like it'll be off line for a number of weeks at least," said Mark Zandi, chief economist of Moody's Analytics.

David Rea, the Japan economist at Capital Economics, puts the chance of Japan having its economy shrink in the first quarter at about 95%, even though the quake came with only three weeks left in the quarter.

Rea expects a decline in gross domestic product, the broadest measure of economic activity, in the second quarter as well.

Who will pay? Japan could get a shot in the arm from the recovery efforts later in the second quarter or by the second half of the year, as both insurers and the government start paying to rebuild roads, ports, factories and homes damaged or destroyed.

"All of that is going to add to GDP, even though there's been tremendous wealth destruction," said Sherry Cooper, chief economist with BMO Financial Group.

Early estimates from catastrophe modeling firm AIR Worldwide are that insured losses will be between $15 billion to $35 billion. Others estimate that total damages will run more than $100 billion.

But even with the Japanese government already weighed down by massive debt of more than twice GDP, economists believe the government will spend what is necessary to recover.

"Generally when you look at disasters in developed economies, the amount of insurance plus government aid is almost always equal to or greater than the amount of the damage," said Zandi.

What will the impact be on the global economy? This is tougher to estimate. Some high-value goods made in Japan, such as computer chips or specialized auto parts, might have limited sources elsewhere around the globe.

So there could be plants in China, Europe and North America that are unable to get parts they need from Japan. But it'll take weeks before the extent of those disruptions are fully known.

"If nuclear power plants there have to stay off line and there are blackouts, it could be disrupting supply chains," said Rea.

But economists believe that most Japanese goods taken out of the global supply chain won't be missed for long.

"Most of the production can be sourced elsewhere, especially due to excess capacity in North America," said Zandi.

The excess borrowing that the Japanese government is likely to take on to pay for reconstruction could drive up bond yields around the globe slightly, Zandi said. But he thinks it would only be by less than a tenth of a percentage point. To top of page

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