Implications of Japan's Earthquake for the Region - Morgan Stanley

Key takeaway: We think the IDR and KRW may perform following the Japanese quake. Indonesia is a large exporter of energy to Japan and Korea may benefit from a substitution effect due to the potential disruption to Japan’s manufacturing capabilities.

Japan is Still Open for Trade: We believe that the dislocation in trade between Japan and AXJ will be relatively light. While there has admittedly been some infrastructure damage to Japan’s ports, Yokohama – the country’s main port – is fully operational. In this sense, Japan is still open for business.

Change in the Pattern of Trade: While the physical disruption to the actual import and export of goods should be minor, there may be a significant shift in the pattern of Japan’s trade following the quake. Imports for resources may increase during the crisis and the following reconstruction period. In this regard, AXJ is in a strong position as it already supplies Japan with priority consumption goods (e.g. food and clothing), energy (e.g. oil and coal) and base metals.

Below is a brief country-by-country analysis (Ordered by its size of export weight for Japan) :

Indonesia: Indonesia has the largest export exposure to Japan in the region (20.4% of total exports). Moreover, given that Indonesia is a key exporter of oil, gas and coal to Japan, its exports are likely to remain buoyant going forward. Indeed, with several of Japan’s nuclear plants shut down, its demand for coal and oil may well increase.

Philippines: The Philippines exports to Japan are a mix of food, furniture and semi-conductors. Food exports are likely to remain strong, given the current hoarding by households. Furniture demand may also pick up after we transition to the reconstruction period. However, the demand for semi-conductors is dependent on whether the gray-outs in Japan significantly disrupt the production of electronic goods.

Thailand: Thailand is a large producer of staple food goods (e.g. rice) and so may benefit from a spike in demand, given the possible food disruption on shore in Japan. The offset is that there may a significant drop in Thai tourism as Thailand is a major export destination for the Japanese.

China & Taiwan: China exports apparel to Japan and other low-cost manufactured goods. Taiwan’s exports are metals, chemicals, and precision instruments. Given the mix, it is not entirely clear what the trade impact will be for these countries. On balance, probably slightly negative, in our view.

Malaysia: Malaysia is an exporter of oil and natural gas to Japan and so may see an increase in export demand following the quake. However, given that the Japanese export market for Malaysia (11.0% of total exports) is almost half the size of that for Indonesia (20.4% of total exports), the MYR could be less positively impacted than the IDR, in our view.

Korea: Korea’s exports to Japan are relatively low (8.7% of total exports). Of far more consequence, though, is the fact that Japan is Korea’s largest export competitor. Thus, with the potential disruption to Japan’s manufacturing capability from rolling gray outs, there may be a substitution effect in favor of Korean exports.

Singapore & India: Singapore and India have low export links to Japan (5.8% and 3.9% of total exports, respectively), mainly because of geographical distance and both being resource poor. As a result, Singapore and India should be largely unaffected by the quake, in our view.

Bottom Line: Japan’s ports are still open for trade following the quake. However, the pattern of trade will likely benefit the resource suppliers in the region, namely Indonesia and Korean exports may also benefit from substitution effect.