Everyone knows that the disaster in Japan, the violence in the Middle East and the euro zone's fiscal strains are bad for the global economy. But no one knows quite how bad. This lack of clarity can be as harmful as the disruption itself.
An increase in stock market volatility is one gauge of uncertainty. The expected volatility of the Japanese stock market increased by 224 percent in the days after the quake, according to the VXJ index, before falling back somewhat. This index, which serves as Japan's fear gauge, surpassed the spike after the Sept. 11th attacks, although it did not match the worst days of the global financial crisis. The equivalent U.S. index briefly surged by 46 percent.
Despite their strong handshakes and leadership training, businessmen are skittish creatures, easily demoralized and deterred. In a recent report, Goldman Sachs cites the work of Nicholas Bloom of Stanford University, who has examined the behavior of firms in the face of 17 "uncertainty shocks," from the Cuban missile crisis to the credit crunch.
The spike in uncertainty alone was enough to make businessmen defer decisions about investment and hiring. Industrial production typically drops by about 1 percent in the first months after an uncertainty shock, Bloom finds, an effect akin to a 7 percentage-point hike in interest rates.
In Japan, the damage to buildings and infrastructure could amount to anything from 16 trillion to 25 trillion yen, according to Japan's government, equivalent to about 3 to 5 percent of Japan's GDP. But that figure does not include a variety of wider, fuzzier costs.
The disaster has reduced Tokyo Electric Power Company's capacity to about 34 gigawatts, 20 to 30 percent short of peak demand at this time of year, forcing the utility to schedule power cuts. The loss of power is compounded by a loss of consumer confidence, both at home and abroad. "The most troublesome thing is harmful rumors and the psychological effect [on consumers] as a result of radiation concerns," says Kaoru Yosano, the economy minister.
The chances that any customer would eat radioactive fish or vegetables from Japan are negligible. But the chance that they would think about radiation when eating Japanese produce is almost 100 percent. That in itself may be enough to spoil their enjoyment of the food.
