Impact of Japan's Earthquake on East Asia's Production Network

Abstract

The earthquake that struck Japan has seriously damaged that country's industrial output, mainly due to deficiencies in electricity supply and damage to distribution networks caused by the disaster. - The region directly affected by the earthquake accounts for 6.2 percent of Japan's GDP, while sectors such as general machinery and electrical machinery represent close to 10 percent. Disruptions in supply of Japanese parts and materials supply chain are hurting manufacturing companies in East Asia and in other areas around the world. - East Asian countries' dependence on Japan for parts and materials is high, with 29 percent for Taiwan and 25.2 percent for South Korea, while the ASEAN-4 (Thailand, Malaysia, Indonesia, and the Philippines) combined equal 21.6 percent. Thus, it is expected that East Asia's production network will be severely impacted. - A sudden and steep rise in the price of non-replaceable parts, and concomitant supply disruption is projected. This may result in a surge in demand for replaceable parts produced in South Korea and Taiwan. The ASEAN-4 account for 18 percent of exports to Japan combined, a relatively high figure. As a result, an economic recession in Japan raises the possibility of stagnation in the ASEAN-4 economies. Operations of Japanese companies in such Asian countries as China, Taiwan, Thailand, Malaysia, Indonesia, and the Philippines were given serious pause. Although the earthquake's impact on the companies in those countries is predicted to be limited, the close monitoring on the potential influence on each industrial sector is required. - Taiwan, a country with a large consumer electronics industry that is highly dependent on component parts from Japan, is considering diversification of its import channels, lowering import tariffs, and prioritizing supply within the domestic market. The damage to industries from the earthquake can occur at two ends – demand and supply. - On the demand side, the decline of ASEAN-4 exports to Japan can start a regional economic downturn. - On the supply side, there is a possibility of cost pressures and increase in prices of industrial product price all over East Asia.