D&B downgrades Japan's risk rating on power shortages, nuke safety concerns

D&B downgrades Japan’s country risk rating in the wake of the most powerful earthquake and tsunami in the country’s recorded history, and amid fears over nuclear safety following explosions at nuclear plants in the region. Power generating capacity is also severely limited, with serious implications for industry nationwide. 

D&B has downgraded Japan's risk indicator from DB2c to DB3a with a negative outlook in light of the spiralling pre-meltdown situation at Fukushima no.1 plant in the tsunami-hit zone and the power shortages affecting eastern Japan since the tsunami hit the Pacific coast of the Tohoku region in March. 

Even if nuclear safety concerns are resolved, we expect reconstruction to be delayed until Q3 due to the severe disturbance to supply chains and infrastructure. The scale of the shock for supply chains nationally and for Japan's external trade, will only become clear in coming weeks and overall our assessment is that the challenges are considerably more serious than the 1995 Kobe earthquake which caused $100 bn in economic losses. 

Assuming no major civil emergency is created by nuclear fears, D&B has revised its real GDP growth forecast for 2011 from +0.6% to -0.4% and D&B's inflation forecast for Japan in 2011 is also now positive at +0.6% against a previous forecast of mild deflation. Even in a best-case scenario, the major gap in baseload generating capacity in eastern Japan due to the offline status of several nuclear plants will lead to industrial shutdowns, in areas remote from the immediate tsunami impact, lasting weeks, impeding the start of reconstruction until after Q2. Power is being rationed and households placed over industry in the queue. Road, rail and water and electricity outages will complicate the task of increasing coal, natural gas and fuel oil deliveries from overseas; and several large importers will probably have to declare force majeure imminently. Not only nuclear plants but also some thermal power plants have been shut down, and one-third of refinery capacity was offline in March. 

Meanwhile, nuclear safety fears continue with attempts to prevent partial core meltdowns and spiralling problems at Fukushima unresolved. In light of these factors, despite the bulk of Japan's industry and population centres being outside of areas affected by the tsunami, Japan's risk indicator remains on negative outlook.