Disruption of trade, fall in commodity prices, surge in yen and decline in outbound investment will affect India, but only to a limited extent.

Calamities, natural and man-made, are not new to Japan and her people. Earthquakes, tsunamis, volcanic eruptions and even a nuclear attack – Japanese people have seen it all and, to their credit, learnt to overcome it all. Yet, even for a people as courageous, resourceful and resilient as the Japanese, the triple disaster which is still unfolding may prove to be quite a challenge.

An earthquake measuring 9.0 – the largest ever in the country’s history, equivalent in power to 30,000 Hiroshimas – was followed by a tsunami which wiped out whole towns and shoved the debris of destroyed towns miles inland, killing 14,000 people - a number that is bound to rise as more details emerge. Even as the scale of horror was sinking in, there came another lethal blow: the earthquake and the consequent tsunami disrupted functioning of the nuclear power plant at Fukushima 240 km north of Tokyo, where there have been explosions, fires and leakages of radiation in the atmosphere. Latest reports speak of contamination of food and milk. So, despite heroic efforts to prevent a nuclear meltdown at the reactors, the crisis could still worsen.

Japan has faced the catastrophe with a determination befitting a great nation. There was no looting and very little complaining among the tsunami survivors. In Tokyo, people patiently stood in queue to meet their tax deadlines.

A crisis of this magnitude is bound to impact the global economy, including Indian, in several ways. As a major trading nation, Japan may be hampered in supplying critically needed intermediate inputs to its partner countries. Exports to Japan will also be hampered as Japanese businesses need time to settle down and take stock of the situation. Cost of commodities, from crude oil to iron ore and from copper to soybeans could drop amidst weakened demand from Japan.

On financial front, stock markets, which were not in a pink of health before the tragedy, have tumbled. Yen has surged to the postwar high of 76.4 against the dollar (current $1 = 80.66) with insurance companies repatriating foreign assets to finance claims payouts and Japanese investors repatriating funds for reconstruction.

Some of these trends could move in the opposite direction when the reconstruction starts. Crude prices and LNG, for example, rebound quickly once the market realises that Japan will now have to depend that much more on fossil fuels for the rebuilding process. West’s military intervention in Libya provides another powerful push to oil prices. Coal, iron ore and base metals could harden for the same reason. The rising yen and, more significantly, the domestic demand generated by reconstruction will push up imports and will surely reduce, if not eliminate, Japan’s current account surplus in the coming months.

These developments and trends will affect India, but to a limited extent. India’s direct and immediate exposure to Japan is limited. Japan accounted for hardly 2.4 per cent of India’s total imports in the six months to September 2010.

Automakers will be among the worst hit. Maruti Suzuki, Honda Siel, Toyota Kirloskar Motor and Nissan Motor India depend on Japan for some critical automotive parts and fully built vehicles. Imports from their parent companies will be affected as their (parents’) factories are expected to reopen by the end of April. Production at Indian plants of these companies, however, may not be affected at present since sourcing is done on medium to long term. Meanwhile, Toyota has postponed the opening of its second plant in Bangalore. Honda Motor Corporation (HMC) has postponed the preview of its small car Brio in India.

However, Indian automakers and other companies which import machinery and components from Japan will be hit by the rising yen. For example, every one per cent strengthening of the yen beyond 83 against the dollar erodes Maruti Suzuki’s margins by 27 basis points, as it procures some technology and parts from Japan.

India’s IT majors Infosys and iGate have been forced to slow down their operations in Japan. Dozens of Indian IT technicians working in Japan have returned to the safety of home.

Currently, India's exports to Japan have come to a grinding halt as the country struggles to come to grips with the consequences of the catastrophic events. Japan also represented 2.4 per cent of India’s exports ($2.5 billion) in the first half of 2010-11, mostly bulk materials. Thus, iron ore exports from India could be impacted in the near term. Some Japanese buyers have sought at least a week’s time to respond to queries on orders already placed. Some exporters could not even get in touch with their buyers as a lot of establishments were shut.

India and the rest of the world can expect a major slowdown of both portfolio and direct investment capital outflows from Japan as their own economy will need more than $200 billion for reconstruction. This will raise the cost of capital globally and therefore affect growth prospects in emerging economies, which, like India, were expecting foreign capital to finance their infrastructure and manufacturing capacity expansion. Clearly, flows of concessional Japanese finances or official development aid will also decline.

India’s direct exposure to Japan in terms of capital investment is also limited. Japan is the sixth largest investor in India in terms of FDI with $22 billion invested in the last 10 years. Nearly 70 per cent of this has come in the last three to four years.

As to portfolio investment, Japanese FIIs pulled out Rs. 700 crore from the Indian market in 2010, which received inflows worth Rs. 29,000 crore. The number of Japanese FIIs investing in India is small. Out of the 1708 FIIs registered with SEBI, around 10 are from Japan. However, according to a leading consultant to FIIs in India, “Most of the FII investment from Japan in India comes through Singapore as India has cooperation agreement with that country. So, it is hard to get an accurate picture of Japan’s FII investment in India.”

Finally, the most significant impact of the Japanese catastrophe will be on the future of nuclear energy. Especially since the Fukushima crisis erupted, several countries have announced steps to scale back or review nuclear power. Germany has temporarily shut down seven of its pre-1980 plants. Switzerland has suspended plans to build and replace nuclear reactors. Even China, no respecter of safety issues, has held up new plant approvals until it could strengthen safety standards. In the US, efforts to revive its moribund nuclear power industry are facing fresh resistance.

In contrast, New Delhi's response has been to launch a public relations campaign to say Indian nuclear plants are safe and secure. Prime Minister Manmohan Singh has ordered a review of safety at Indian nuclear installations and reassured Parliament on this score. But it has not convinced sceptics. The Indian establishment, let us face it, is corrupt to the core and has a long history of cover-ups and incompetence, witness its handling of the nuclear deal and Bhopal gas leak tragedy. There is a growing demand that given the gravity of the Fukushima crisis, India must review its nuclear power policy and systems to ensure that long-term risks of nuclear accidents are contained.

As a silver lining to the dark clouds, the Japanese reconstruction demand will contribute to rectifying global economic imbalances and provide a demand impetus not only to its own economy but also the global economy. The full positive impact of this demand will be felt towards the end of this calendar year.

Meanwhile, let us salute the extraordinary fortitude, discipline and calm shown by the people of Japan in the face of the worst-ever disaster to have hit the country since the Second World War. And let us pray that the handful of heroic Japanese technicians who are valiantly fighting to avert the meltdown at Fukushima power plant succeed in their efforts.

The author is Executive Editor, Corporate India, and lives in Mumbai