Radiation Fears Threaten To Deepen Japan's Economic Struggles

03/28/2011 05:12 pm ET | Updated May 28, 2011

NEW YORK -- Still reeling from a devastating earthquake and tsunami, Japan must also contend with a force that could further stall its delicate economy: fear.

The disaster that struck Japan's northeast coast earlier this month crippled the country's trade, as ports, roads and factories were destroyed. Failures at nuclear reactors caused rolling blackouts, further complicating production. In the days after the earthquake, the value of Japan's currency experienced a historic rise, which threatened to make the products the country did manage to export less attractive to foreign buyers.

And now, in the wake of the reactor problems, many consumers and even governments have attached a stigma to Japanese goods amid mounting concerns of radiation poisoning.

Fears take a variety of forms. Concerns of widespread nuclear contamination have caused some buyers to shun Japanese agriculture. Meanwhile, worries about supply chain disruptions have prompted others to buy certain niche products in large quantities, and a reworking of widely used "just in time" manufacturing methods to account for those shifts could raise prices globally.

Such fears will likely strain the country's economy, and potentially those of other countries, for months to come, or for as long as the full implications of the Japanese disaster remain unknown, economists say.

"There's a huge, huge fear factor involved here. Some of it is justified, some of it is not justified," said Nariman Behravesh, chief economist of IHS Global Insight, an economic and financial analysis firm. "For Japan, it's one more negative in terms of long-term growth."

In Asia, shoppers are already avoiding Japanese-grown foods, Bloomberg News reported. Unlike industrial products, food is grown outdoors and cannot always be easily cleaned if it comes into contact with radiation.

Reports have emerged of abnormal radiation levels detected in milk, spinach, sweet potatoes and water. On Friday, authorities in Taiwan detected radiation in the paper packaging of udon noodles, Nikkei News reported.

These reports are tempered by reminders that the detected radiation levels remain safely within their legal limits. At this point, fears of radiation poisoning in food are probably overblown, according to Arthur Alexander, an economist at Georgetown who specializes in Japan.

"There's a lot of nervousness around. They see there's radiation in the air," Alexander said. "Consumers react in a highly emotional way."

But whether such fears are justified seems not to matter. Already, nervousness has caused world powers to shut out Japanese products.

Thailand's Food and Drug Administration has announced that it will destroy a shipment of Japanese sweet potatoes that, it says, contain radioactive iodide. China has banned imports of certain Japanese food products. South Korea has forbidden food imports from the Japanese prefectures affected by the nuclear crisis. The European Union is imposing strict tests on Japanese food products.

The United States will prevent all milk, fruit and vegetables from four Japanese prefectures from entering the United States, the Food and Drug Administration said in a statement.

Japan's economy already faces challenges. The week after the earthquake, Wells Fargo cut its forecast for Japan's second-quarter economic output, now predicting that the economy will slip into recession until the second half of the year. Moody's Analytics predicts a gross domestic product growth rate of 1 percent for this year, down from the firm's pre-earthquake forecast of 1.4 percent. That outlook includes a recession projected to continue until the second half of the year.

And the strain could become greater.

"Consumers and importers everywhere are going to err on the side of caution," said Jeffrey Garten, a professor of international trade and finance at Yale and a former undersecretary of commerce for international trade in the Clinton Administration. "They simply don't know how bad this situation could be, and they don't trust anyone enough to make a definite assessment."

"I think we're in the early innings of a much longer game," Garten added.

Just as oil investors are making trades based on fears of unknowns, purchasers of Japanese goods seem to be playing it safe. And such a stance strains Japan's economy, even though food exports accounted for less than 1 percent of the nation's total exports last year. Such exports have become more important in recent weeks, experts say, as trade in other goods has suffered.

The real risk, moreover, isn't about food. It's that the stigma now placed on food could spread to other goods as well. Jay Bryson, an economist at Wells Fargo, outlined a potential worst-case scenario.

"If there really is a nuclear meltdown there and it contaminates hundreds of squares miles of area in Japan, all those factories cannot produce any more for a long, long period of time," Bryson said. "You can rebuild a factory, but that takes years."

The effects of Japan's economic struggles on the rest of the world remain unclear. Certain global manufacturers have been forced to halt production due to shortages of essential components made in Japan. Anticipating more such shortages, some companies have gone on buying sprees.

And the current system is generally short on redundancy. One particular type of videotape is only produced by Sony, which has closed a crucial Japanese plant, The New York Times reported. That supply limit has prompted film industry suppliers to buy as much of the film as possible.

Such scenarios could easily lead to higher prices as goods become scarce, economists say.

"The global trading system over the last 20 years has evolved into very complex and very attenuated supply chains, where if one thing goes wrong in one country you can have reverberations all through the logistical system," Garten said. "I think that that's the one thing that you know is going through the minds of CEOs around the world."

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