Japanese Headwind May Hit Asia's Economies (ext fr Reuter)

By PATRICK BARTA And BRIAN SPEGELE

Disruptions to Japan's economy in the aftermath of last week's earthquake and tsunami are expected to ripple across Asia in the coming weeks, further muddling the region's economic picture at a time when countries are already struggling with higher oil and food prices.

Asia overall is still expected to post vigorous growth this year, with estimates of gross domestic product of 7.5% to 8% excluding Japan. But economists were already predicting growth would slow from last year, when regional GDP surpassed 9% in a rebound from the global financial crisis, with central banks hiking interest rates and consumers starting to rein in spending to combat higher inflation.

Japan's disaster adds another set of uncertainties, at least in the short run. Friday's quake decimated vital infrastructure in parts of Japan and may leave many factories without reliable power supplies for weeks to come, jeopardizing supply chains for some of Asia's biggest exporters. Steel, paper and consumer-electronics plants were among those closed Monday.

"Ports are closed and deliveries are affected, especially in the electrical industry—containers are stuck in the ports," said Fu Wing Hoong, president of the Electrical and Electronics Association of Malaysia, which is a major producer of electronics components including some that rely on parts made in Japan. "Any disruption in the electronics sector in Japan will definitely have an impact," he said.

Economists said the good news was that heavy spending on reconstruction projects would eventually help restore Japan's economy, which in turn could result in a surge of demand for some Asian products such as wood and other commodities. But any rebound isn't expected to come until the latter part of the year, with a sharp slowdown—or possibly even a contraction—expected in the next quarter or two.

Trade between Japan and other Asian countries may fall sharply in the short run, said Tim Condon, an Asia economist at ING in Singapore. Combined with other problems such as high inflation, that means "the next round of revisions to growth in Asia will be down," he said.

Japan remains a critical part of the regional economy despite recently losing its place as the world's second-largest economy after the U.S. to China. It is the biggest source of foreign direct investment for some parts of Asia and a key generator of tourist revenue, especially for countries like Thailand, which receives an estimated one million Japanese visitors a year. It's a major source of remittance revenue for places like the Philippines, which has more than 200,000 of its citizens working in Japan, including thousands in the hardest-hit areas.

Japan is also one of the region's most critical trade partners, buying up much of the iron ore, coal, natural gas and other commodities produced in Indonesia, Australia and elsewhere and accounting for about 10% of the region's exports overall, according to ING's Mr. Condon.

In a report to clients, JP Morgan argued the earthquake "added to the unusual array of shocks that are buffeting the global economy in early 2011," including higher oil and food prices and severe winter weather in the U.S. and Europe. The bank lowered its U.S. growth forecast for the first half of the year Friday for the second time in two weeks and said it is likely to make further downgrades "elsewhere around the globe in coming days," though it stressed many of its concerns may prove temporary.

Japan's problems "will impact the global economy, which will in turn feed back to us," Singapore Foreign Affairs Minister George Yeo said over the weekend at a community meeting. Combined with uncertainties in the Middle East, "I think the world is entering a new phase, and we have to be very alert and not take things for granted and not be too confident," he said.