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How Will the Events in Japan Impact the U.S. Economy?

While our concerns should be first, and foremost with the people of Japan, I've been asked several times how the events in Japan will affect the U.S. economy. The impact on the U.S. is hard to determine at this point, so it's hard to say much with certainty, but there are some rough guidelines to follow when thinking about the problem.

To begin, it's useful to think on an industry by industry basis, and to separate importers from exporters. Firms in the U.S. that export to Japan will, of course, have troubles in the short-run, and some of those problems will persist in the longer run as well. But for some industries, e.g. those in the U.S. who supply building materials to foreign markets, the reconstruction effort will increase the demand for their products. So most exporters will face a drop off in demand in the short-run, and the longer run impact is mixed.

When it comes to imports from Japan, it's a different story. Not all industries in Japan are affected, so not all imports from Japan will be affected either. But some will be, and industries in the U.S. that compete with these imports will benefit from the disruption in production. That is also true for industries that compete with Japan in foreign markets. The disruption of supplies from Japan will reduce the competition that US producers face.

There are also worldwide effects such as changes in oil prices and changes in interest rates to consider. In the short-run, the decline in oil demand from Japan will depress oil prices and help most U.S. industries, and that has already happened, but the rebuilding effort will likely increase the demand for oil and other commodities and result in higher prices in the long-run. So the reprieve will be short-lived.

The rebuilding effort will also require considerable levels of government spending that will need to be financed by borrowing on international markets, and an additional concern is that this increased demand for funds might increase interest rates. For the moment that is not a worry, long-run interests rates have remained low even with the prospect of this additional borrowing, and there is no sign that will change anytime soon. Thus, while it's worth keeping an eye out for interest rate increases down the road, for now this is not a concern.

Historically, the negative economic impact of natural disasters has been less than many people initially feared. Let's hope the present case is no exception.

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