Canadian economy and the Japanese connection...

As the scale of the tragedy in Japan slowly becomes clear, economists and other analysts say the impact to the Canadian economy is decidedly mixed.

Once Japan begins the long, arduous process of rebuilding homes, factories and shops, demand for Canadian construction goods such as lumber could soar.

Tourism operators in Western Canada, long a popular destination for Japanese travellers, could take a big hit in the short term, as could the Ontario economy because of disruptions in the automaking sector.

In 2009, the most recent data, there were 85,575 Japanese visitors that spent at least one night in B.C. It is estimated they spent $111 million in total.

“In the short term, it's not good for anybody,” said Brian Bethune, chief Canadian economist at U.S.-based economics analysis firm IHS Global Insight.

“There will be decreased imports and exports, supply chain disruptions, and reduced travel.”

It also wreaked havoc with the loonie.

In trading Tuesday, the loonie closed down 1.19 cents (U.S.) at 101.63 cents after going as low as 100.26 cents.

In the medium to longer-term, however, Bethune believes demand for fuel and lumber will be a boost for Canadian commodities suppliers.

The reconstruction of Japan, which some estimates have pegged at over $200 billion, won't just be taking place in the north of the country, the area hardest hit by the earthquake and tsunami, believes Paul Beamish, international business professor at the Richard Ivey School of Business at the University of Western Ontario.

“If you are living in a village down the coast from one of the affected areas, and your home or your business was built the same way with the same materials as the ones which were affected, are you going to feel safe? I don't think so,” said Beamish.

“I think this is going to lead to a complete change in the way things are built there, and that will lead to a huge demand for lumber,” Beamish added. “It's going to help everybody who supplies construction materials. As horrific as a humanitarian catastrophe as this has been, the reconstruction in some ways will be a massive stimulus.”

The head of Canada's main lumber industry group bemoaned the human tragedy unfolding in Japan, but admitted his group's members could benefit.

“We believe we'll be part of the solution to rebuilding Japan. Not the whole solution, because it's going to be a massive effort, but we'll be part of it,” said Avrim Lazar, president and CEO of the Forest Products Association of Canada.

Lazar says the reconstruction will boost the price of softwood lumber on world markets.

“It will definitely boost global prices, but it's still too early to tell by how much,” said Lazar.

Lazar believes wood will be especially popular as Japan seeks to find stronger construction methods. Because it's flexible, it doesn't snap or crumble under tension as easily as other materials as concrete or metal, Lazar explained.

“That's one aspect of our products that has already been of interest in Japan,” said Lazar.

Meanwhile, Toyota has eliminated overtime at its two assembly plants in Cambridge and Woodstock temporarily this week to ease demand for parts from Japanese suppliers. It will allow staff from those Japanese suppliers to assist in disaster relief efforts instead of producing parts.

A spokesman for Honda Canada said the Japanese catastrophe has not affected assembly operations in Alliston, because most of its parts come from North American suppliers. Honda has idled several operations in Japan this week because of the need to conserve energy.

Japanese products such as TVs and radios won't be heavily affected in Canada, said Beamish. “A lot of the Japanese products we buy here now are actually made in third countries like China.”

Tuesday, the Royal Bank of Canada said it is lowering some of its fixed rate mortgages by as much as 0.2 percentage points effective Wednesday, The Canadian Press reports, because investors are jittery over fears a potential nuclear disaster in Japan could severely derail the global economic recovery.

Oil drops below $98 as radiation leak at Japanese nuclear plant spooks investors

Oil prices slumped below US$98 a barrel Tuesday as traders braced for the worst in Japan, where a third explosion in as many days at an earthquake-damaged nuclear plant triggered a radiation leak.

Stock markets, an indicator of investors' outlook on the global economy, fell sharply across the world, dragging energy prices with them.

By early afternoon in Europe, benchmark crude for April delivery was down $3.37 at $97.82 a barrel in electronic trading on the New York Mercantile Exchange. The contract added 3 cents on Monday to settle at $101.19. In London, Brent crude was down $4.58 at $109.09 a barrel on the ICE futures exchange.

The 9.0-magnitude earthquake on Friday and ensuing tsunami have hit demand for oil by shutting down five Japanese refineries — two due to fire. The affected refineries have combined daily capacity of 1.4 million barrels of oil, according to Platts, the energy information arm of McGraw-Hill Cos.

Prime Minister Naoto Kan said Tuesday that radiation that has spread from four reactors of the Fukushima Dai-ichi nuclear plant was enough to "impact human health" and the risk of more leaks was "very high." The plant was initially damaged Friday.

Kan urged anyone within 30 kilometres of the plant, some 140,000 people, to stay indoors or risk getting radiation sickness.

Officials said Tuesday they have detected slightly higher-than-normal radiation levels in Tokyo but insisted there are no health dangers.

Japan's benchmark Nikkei 225 stock average plunged as much as 14 per cent Tuesday before closing down 10.6 per cent after a 6 per cent drop Monday. Leading markets in Europe were down 3 to 5 per cent.

"We're seeing a knee-jerk reaction due to this fresh explosion," said Victor Shum, an analyst with energy consultancy Purvin & Gertz in Singapore. "It's uncertain how much radiation is coming out or could affect Tokyo and that's caused this across-the-board market reaction."

The International Energy Agency's monthly report on the oil market slightly increased its forecast for global oil demand in 2011 — by a daily 90,000 barrels — to 89.4 million barrels a day.

"Persistently high oil prices entail significant downside risks to this year's prognosis," which did not account for the impact of the events in Japan, the IEA said. "Nonetheless, short-term fuel switching within the power sector is likely to be significant, with oil, gas and coil all being used to make up for the loss of its nuclear output."

Some analysts predicted that the immediate dampening effect of the earthquake on Japanese oil demand soon would be reversed.

"While several refineries have been destroyed by the earthquake and tsunami, and the level of crude oil refining is lower accordingly, the demand for diesel for power generation is higher after numerous nuclear power stations have had to be switched off," said a report from Commerzbank in Frankfurt. "Consequently, Japan's demand for oil is more likely to increase than decrease."

The Paris-based IEA also warned that while the conflict in Libya between rebels and forces loyal to Moammar Gadhafi was far from settled, its impact on the country's oil exports could be prolonged.

"What is becoming clearer is that the country's oil production and exports could be off the market for many months due to both war-inflicted damage on oil infrastructure and international sanctions", the IEA report said. It added that Libya's oil exports — which averaged nearly 1.3 million barrels a day in 2010 — had "ground to a halt."

Italy, France, Germany and Spain were Libya's largest purchasers of oil last year, the IEA said.

The market, meanwhile, is also awaiting fresh information on U.S. oil stockpiles.

Data for the week ending March 11 is expected to show a build of 2.1 million barrels in crude oil stocks and a draw of 1.5 million barrels in gasoline stocks, according to a survey of analysts by Platts, the energy information arm of McGraw-Hill Cos.

The American Petroleum Institute will release its report on oil stocks later Tuesday, while the report from the Energy Department's Energy Information Administration — the market benchmark — will be out on Wednesday.

In other Nymex trading for April contracts, heating oil was down 11.11 cents at $2.9527 a gallon and gasoline dropped 13.39 cents to $2.8264 a gallon. Natural gas fell 0.1 cent at $3.904 per 1,000 cubic feet.

___

Alex Kennedy in Singapore contributed to this report.