Japan’s real GDP
growth will slow, but the slowdown will likely be temporary, as a
result of the earthquake and tsunami and growth should start
picking up after mid-2011 as reconstruction efforts get underway,
says the World Bank in its latest East Asia and Pacific Economic
Update released today.  

While it is still too early for a full assessment, Japan’s past
experience suggests an accelerated reconstruction effort, and the
short term impact on the economies of developing East Asia is
likely to be limited. 

The report, titled Securing the Present, Shaping the
Future, was finalized in the weeks prior to the
disaster in Japan.

In new research prepared since the quake and tsunami struck
Japan, the World Bank provides preliminary analysis on the
implications for the region with a focus on trade and finance.
However, the analysis points to uncertainties and ongoing
challenges posed by the unfolding situation involving nuclear
reactors in Japan.

“Clearly given Japan’s importance in East Asia, the tragic
events unfolding will be felt in the region. But it’s far too early
to give an accurate assessment of the likely damages,” said Vikram
Nehru, World Bank Chief Economist for the East Asia and Pacific
region. 

“At this stage, we expect the
economic impact of this disaster on the East Asian region to be
fairly short-lived. In the immediate future the biggest impact will
be in terms of trade and finance. We expect growth in Japan will
pick up as reconstruction efforts
accelerate.”

On trade, if the Kobe earthquake of 1995 is to serve as a
historical guide, Japan’s trade slowed only for a few quarters;
Japanese imports recovered fully within a year and exports
rebounded to 85 percent of pre-quake levels. But this time around,
disruption to production networks, especially in automotive and
electronics industries, could continue to pose problems. 

On finance, about one-fourth of East Asia’s long-term debt is
denominated in yen, ranging from about 8 percent in China to about
60 percent in Thailand. A one percent appreciation in the Japanese
yen would translate into about a $1 billion increase in annual debt
servicing on yen-denominated assets held by East Asia’s developing
nations.

Looking back on 2010, the report characterizes the region’s
output growth as surprisingly strong, with real GDP growth
amounting to 9.6 percent for the year as a whole. Growth was also
broad-based: six countries in developing East Asia grew by 7
percent or more in 2010.

This is largely the result of sustained monetary and fiscal
stimulus measures and stronger growth in demand abroad. Real GDP
growth is projected to settle to about 8 percent in 2011 and
2012.

 The outcome in 2011 is likely to be more subdued as
fighting inflation becomes a short-term priority. Lowering
inflation presents particularly difficult policy choices for
middle-income countries in East Asia, where the application of
monetary policy has been complicated by a surge in portfolio
capital inflows and rapidly increasing food and commodity
prices. 

The bulk of the adjustment burden will likely rest on fiscal
policy, where the challenge lies in lowering deficits more rapidly
while creating the fiscal space to finance critically needed
infrastructure and assure necessary social investments and cash
transfers to the poor.



The report also examines the region’s outlook in the medium to long
term, asking whether it can harness opportunities and tackle
challenges to proceed on a path of rapid and sustained growth. The
earthquake and tsunami in Japan serve as a stark reminder of one of
East Asia’s greatest challenges - its vulnerability to natural
disasters.

The region covers half of the earth’s surface, is home to 59% of
the world’s population, but has had over 70% of the world’s natural
disasters. East Asia’s urban centers, increasingly where output and
population are concentrated, are under threat of extreme weather,
rising sea levels and other hazards. Countries must work to build
innovative and disaster resilient cities, ensure environmental
sustainability, and adapt to the effects of climate
change. 

With the world’s economic center of gravity shifting gradually
toward East Asia, the region must also assume new responsibilities,
contributing more toward global public goods. “East Asia can
continue to grow rapidly if it is willing to make the tough
decisions needed to ensure macroeconomic stability in a volatile
global economic environment.

At the same time, it must address medium term challenges such as
accelerating regional economic integration, reducing economic and
social inequalities, and lowering the carbon intensity of
production and consumption,” emphasized Vikram Nehru.