Metals News
Japan's Reconstruction May Fuel China's Inflation
data analysis
Mar 22,2011

BEIJING, Mar. 22 -- The rising price of oil, gas and other commodities, because of rising demand as reconstruction work begins in Japan, will keep China's inflationary pressure at a high level, World Bank economists said on Monday.

"Japan's demand for commodities in the aftermath of the recent disasters will add to the already high-level of demand for commodities," said Vikram Nehru, the bank's chief economist for the East Asia and Pacific region.

There might be an increase in commodity prices as a result of increased demand, and because of problems in Western Asia and North Africa, he added.

Louis Kuijs, senior economist at the World Bank's Beijing office, said that inflationary pressure is unlikely to diminish quickly, given the rise in energy prices and the already high price of food.

"There is still room for China to further tighten its monetary policy this year," said Nehru.

To soak up liquidity and control inflation, China's central bank raised the required reserve ratios for banks by 50 basis points last week, the ninth hike since the beginning of 2010. Before that, it raised interest rates in February for the third time since October.

China's consumer inflation rose to 4.9 percent in January and February from 4.6 percent in December. It hit 5.1 percent in November, a 28-month high.

Around one-fourth of East Asia's long-term debt is denominated in yen, ranging from around 8 percent in China to about 60 percent in Thailand. A one percent appreciation of the Japanese currency translates into a $250 million increase in annual debt servicing for the region, the World Bank said.

"As China holds a very limited amount of long-term debt, and that which is yen-denominated is even less in the portfolio, the impact (on China) will be very limited," said Kuijs.

The disaster in Japan drove up the yen last week on expectations that domestic retail and corporate investors will begin to "repatriate" money for the reconstruction efforts.

If history is any guide, real GDP growth in Japan will be negatively affected until the middle of the year. Growth should pick up in subsequent quarters as reconstruction efforts, which could last five years, accelerate, according to a supplement to the World Bank's semi-annual East Asia and Pacific Economic Update.

"A temporary growth slowdown in Japan will have a modest short-term impact on the region," it said.

Though the bank did not offer its own forecast about the likely cost of Japan's disaster, it cited private estimates that the losses could range from $122 billion to $235 billion, or 2.5 to 4 percent of the country's GDP. The 1995 Kobe earthquake caused $100 billion in damage, or about 2 percent of GDP.

Private insurers are likely to bear a small proportion of the cost, leaving most to be covered by households and the government, the World Bank said.

Swiss Re estimates that claims costs in Japan will total $1.2 billion, net of retrocession (the purchase of reinsurance by a reinsurance company) and before tax.

However, the estimates are subject to a high degree of uncertainty as events continue to unfold, making loss assessment particularly challenging, said Swiss Re in a statement on Monday.

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