Stocks Tumble Worldwide on Japan Quake News

Investors head for the hills on worsening picture in Japan.

March 15, 2011— -- Financial reverberations from Japan's record earthquake and nuclear plant woes continued Tuesday with markets falling worldwide, capping an 18 percent decline on the Tokyo stock exchange.

Stock markets around the world have swooned since the March 11 quake that killed at least 2,700 people in Japan with at least another 3,700 missing, according to government reports. Radiation leaks from nuclear plants in the northern part of the country have prompted evacuations of more than 140,000 people.

Japan's stock market decline was the biggest since the financial crisis of 1987. In the U.S., stocks opened sharply lower again Tuesday after dropping about 6 percent Monday. The Dow Jones Industrial Average fell 272 points in early trading, a 2.3 percent decline. Oil and gas prices have eased with news of the quake on concern that the disruption may slow economic growth. The futures market, which can indicate how stocks will perform, looked so ugly before trading began that the New York Stock Exchange invoked a special rule to smooth volatility, according to the Associated Press. The Dow recovered somewhat later in the day but still closed down 138 points, or more than 1 percent.

Fear had taken hold in the market as traders worried about the nuclear crisis and a possible slowdown in Japan's economy, the world's third-largest, Peter Cardillo, chief market economist at New York-basedbrokerage house Avalon Partners, told the Associated Press.

"It's a situation where you sell, and you ask questions later," he said.

Yesterday, the Department of Energy reported said that the retail price of gas has risen to an average $3.567 a gallon nationwide, up 4.7 percent from a week ago. The biggest increases were in California (8 percent) and the West Coast generally (7.4 percent).

Consumers, however, may also now have to contend with a reduction in the number of fuel-efficient cars imported from Japan.

Japan's manufacturing sector was hit hard by the quake and is still reeling. U.S. imports of everything from cars to consumer electronics to semiconductors eventually may be affected.

The biggest U.S. imports from Japan include passenger cars ($41.4 billion), automotive accessories ($8.8 billion), computer accessories ($6.7 billion) and semiconductors ($3.5 billion).

For the moment, the big Japanese car makers have plenty of inventory sitting on U.S. wharves, awaiting delivery to showrooms.

Honda spokesman Marcos Frommer says that U.S. consumers haven't been affected. "There's been no impact. We make 80 percent of the Hondas sold in the U.S. right here in North America. We anticipate consumers will continue to see plenty of cars at the dealership." He adds, however, that Honda is continuing to evaluate the longer-term situation.

The 20 percent of cars imported includes the Honda FIT, the Insight hybrid and the Civic hybrid. In Japan, he says, "All production is suspended currently—both finished vehicles and parts."

Javier Moreno, a spokesperson for Toyota says, "At this point, we have enough supply in the pipeline that the impact to North America will be minimal." About 65 percent of Toyotas are built in the U.S., the rest imported from Japan. Production in Japan, he says, will be suspended for at least three days--March 14, 15 and 16. "That's 40,000 units that will be affected, not all of which would have gone to North America." Toyota hasn't yet decided when it will resume production.

"The biggest issue for U.S. consumers," says Gary Hufbauer, senior fellow at the Peterson Institute for International Economics, "is how quickly they can get power grid going again at its full capacity. The quake affected the northeast, not the industrial heartland of Japan. The northeast accounts for only about 4 percent of Japan's GDP."

Nationwide, he says, Japanese industry is facing a reduced supply of electricity, caused in part by the shutdown of nuclear plants damaged by quakes or water. "They get about 20 percent of their power from nuclear," he says. "Of that, about a quarter could be down for a long time. That's a pretty big hit."

Factories in the region, including ones belonging to Sony and Toyota, have chosen temporarily to suspend operations, so that the available electricity can be put to domestic household use.

Bob Cole, a Japan specialist and professor emeritus at the Haas School of Business at U.C. Berkeley, thinks Toyota may be the hardest hit of Japan's car makers. Reason? They're the one most dependent on locally-produced content, he says.

"The Lexis, the Yaris, the Prius and the Scion are all produced entirely in Japan," says Cole. "The Prius was already in short supply, due to rising U.S. gas prices. The profit margin on the Prius and the Lexis is large. This will affect Toyota's bottom line pretty quickly."

Cole notes, too, that one of Japan's leading engineering schools, Tohoku University, is in Sendai, a city badly hurt by the quake. It specialized in the kind of optical technology needed to produce semiconductors as well as cameras and other consumer optical devices. Sony, Nikon and Canon all had operations centered around the school, and all of these may have sustained serious damage.

Gary Hufbauer says in the next two weeks Japan will address its power shortfall by boosting output from under-utilized gas- and oil-fried power plants. Increased use of coal, though, isn't an option: "The coal fired plans are already running close to 100 percent capacity."

The time required to ship goods to the U.S. by sea averages 15 to 20 days, so, for that much time at least, the pipeline of goods will continue to deliver at pre-disaster levels. And afterwards, says Hufbauer—if the power situation improves -- manufacturers ought to be able to make up any shortfalls by increased overtime.

What if the power situation doesn't get better?

"If it gets worse, then by mid-May the U.S. will begin to see shortages in, say, cars and electronics. We'd be feeling it. Inventories by then would have been run down.