Economists have already started to build scenarios to assess the final impact of the unfortunate disaster in Japan on the world’s economy this year. Most analysts do not foresee a major change from the earlier predictions made earlier this year, and estimate the impact to be in the range of 0.1% to 0.2% at best. Also it is expected that the reconstruction efforts will spur the growth process later in the year compensating for some of the loss.

What is more interesting to see is the effect on global manufacturing. Modern day manufacturing relies extensively on globalized supply chains and Japan plays a key role across a number of sectors. How will this impact the manufacturing outlook for the year? Will the impact be felt by the consumers or is the supply chain resilient and diverse to manage this crisis?

Japan’s role in manufacturing

Over a period of time, Japan’s contribution in the world manufacturing output has reduced. China today accounts for about a fifth of the world’s output, while Japan now contributes a tenth. It is no longer leading the growth engine for Asia. Thus the impact of this disaster would be much lesser in the current context compared to a few decades ago.

However Japan is a very important link in high technology products in electronics, automotive, high end machinery and engineering. In the immediate aftermath of the twin tragedy of the earthquake and tsunami, a number of plants were shut down. Leading Japanese manufacturers like Sony, Toyota, Nissan, Hitachi and Mitsubishi announced suspension of manufacturing activities to assess damage and evaluate the ability to resume production.

While it would be premature to indicate the real impact of these shutdowns, it has started creating gaps in the supply chain. The resumption of production activities is compounded by the breakdown of transport links, fuel and electricity. In such a scenario it seems likely that there will be an impact on the final consumers as the stock of critical components dries up and is not adequately replaced from other sources or locations.

The Just-in-Time factor

Japan let the world to the JIT concept as the most efficient way to produce. Japanese companies, especially in the automotive sector have perfected this over time to achieve near zero inventories on the assembly lines. Parts and components come directly to assembly line-side on hourly and daily supply runs.  

While this system of production is extremely effective in cost, quality and delivery during normal times, this very concept may prove to be the biggest bottleneck is resuming normal flow of components and parts. As inventories dry up, it will be the most inefficient who would be able to support the fastest!

Looking ahead

Japan has been able to bounce back very quickly as demonstrated by the earlier earthquake in Kobe in 1995. However even then it created a serious dent in Japan’s confidence to battle natural disasters. Some analysts link the disaster in 1995 to the gradual decline of Japanese manufacturing as it lost ground to China and Korea. Will this disaster also be more far reaching for Japanese manufacturing than what it seems?

Only time will tell.

The explosions at the nuclear reactors at Japan’s Fukushima Daiichi nuclear complex have raised concerns not only about the radiation effects on humans but also about food supplies coming from Japan. Several countries like China, Hong Kong and other Southeast Asian countries have put in place preventive measures to check contamination levels of Japanese food imports.

A nuclear fallout will release radioactive particles into the atmosphere and these will contaminate the surface on which they are deposited. This would mean standing crops, fruit and vegetable farms, grazing land and water sources. This would then find its way into humans if they consume the food directly or indirectly through milk and meat products from animals who consume contaminated vegetation and water.

A number of consumers have been concerned about the safety of Japanese food following the release of radioactivity. They have been asking local retailers about the safety of farm and dairy produce imported from Japan, since most of these products are typically flown in.

Is the threat real?

The current levels of radioactivity reported at Fukushima do not warrant any panic. Moreover the radiation has been contained to with a 20km radius of the nuclear power plant. This area has been completely evacuated so it is unlikely that any farm produce will find its way into the market. However it is extremely important that the situation is not allowed to deteriorate any further, and the authorities are able to contain the disaster at current levels.

Earlier reports indicate high levels of radioactive iodine and cesium in the vicinity of the power plants.  Radioactive iodine has a shorter half life so its effect is limited. However half life of Cesium is about 30 years, so its effect is seen over a long period of time. This would effectively mean that the entire area around the 20 km radius will not be usable for a long period of time.

Long term implications  

Japan would have to manage the effects of this disaster very carefully, both in terms of how it produces energy safely in the future as well as managing the effects of released radiation in the atmosphere. Consumer perception about safety is very strong and even though the food is eventually determined safe for consumption, it will have an impact in the short term in terms of falling sales. Depending on the eventual severity of the nuclear fallout, it may have serious implications in the longer term on Japanese food products.