The crisis in Japan stemming from a triple disaster ― a 9.0-magnitude earthquake, a subsequent giant tsunami and blasts at a nuclear power plant ― is deepening, causing concern that it could take a toll on the Korean as well as the global economy.
Korean policymakers initially said the impact of the Japanese disaster on the national economy would be temporary and limited. They need to change their assessment and prepare for the risk factors posed by the worsening Japanese crisis.
The growing fears of radiation in Japan have rattled global financial markets, driving investors to sell stocks and buy government bonds instead. But policymakers need to keep an eye on global capital flows in the long term, as Japanese investors could withdraw their overseas investments to finance recovery projects in Japan.
According to the Financial Supervisory Service, Japanese holdings of Korean stocks and bonds are valued at around $7 billion, not large enough to have a major impact on local financial markets. But attention needs to be paid to the chain effect that the expected changes in the flow of Japanese capital could trigger in the global markets.
Seoul policymakers also have to prepare for the long-term impact of the emergency measures taken by the Bank of Japan. To keep the economy running, the central bank is pumping money into the financial system. The BOJ’s action will weaken the Japanese yen, which will have a negative effect on Korean exports.
Korean exports to Japan are expected to drop due to a contraction in consumption and investment. Japan is Korea’s third-largest export market, and accounted for 6 percent of Korean exports last year.
Manufacturers that rely on components from Japan will have to review their sourcing plans, as recovery of damaged Japanese factories and infrastructure is expected to take months. Last year, Japan supplied 25 percent of Korea’s parts imports.
More serious damage is expected in the tourism industry, which relies on Japan for about 35 percent of its revenue. Policymakers need to find measures to help the businesses in the sector cushion the impact.