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Economic cost of the Japanese quake and tsunami: $100 billion and rising

Japanese economy | Economic cost of the Japanese quake and tsunami: $100 billion and rising Anthony Harrington

With the damage caused by the fifth largest earthquake ever recorded (magnitude 9.0) still being assessed, the expectation is that the impact on Japan’s economy will follow a similar path to that seen after the somewhat smaller (magnitude 7.2), but still devastating Kobe earthquake of 1995. The human loss, however, will be far in excess of that experienced at Kobe. Initial estimates put the likely death toll at in excess of 10,000. It would be surprising, given the scale of the devastation, if that figure is not revised upwards in the days to come.

If we turn from the human to the economic cost, in general terms, the pattern of events after Kobe saw a sharp fall-off in economic activity in the weeks immediately after the quake, with a subsequent boost to output and GDP in the rebuilding phase as a result of sustained public expenditure. However, economists such as HSBC group chief economist Stephen King are warning that with Japan already experiencing one quarter of negative growth it seems certain that following the magnitude 9.0 earthquake and tsunami, the present quarter looks certain to be negative as well. This will put Japan in a “double-dip” technical recession, even if it is short-lived. King also warns that while public spending on rebuilding is likely to run to hundreds of billions of yen, this will not be a pure positive stimulus to the economy. The problem with it, he suggests, is that the scale of the rebuilding effort will divert massive resources away from potentially more profitable and higher growth investment opportunities. This is bound to have a weakening effect on the economy of a country that is struggling with long term stagnation and the spiralling costs associated with an ageing population.

Predictably, the Tokyo market responded on the first trading day following the quake by plunging 6.18%, wiping some 2.3 trillion yen ($287 billion) off market values. Some of this will be a paper loss if the market rebounds over the next few days, but the trend is alarming. The yen, seemingly paradoxically, strengthened as currency traders realised that major Japanese multinationals could be expected to repatriate billions of yen to rebuild internal infrastructure, creating a significant demand for yen. The Bank of Japan threw 183 billion yen into an effort to stop the currency appreciation from going too far and has given a firm steer that it intends to be active to contain excessive currency movements in either direction. Faced with that kind of firepower, currency traders are likely to resist the temptation to take massive positions in the yen.

Early estimates being given for the impact to the world economy, the most authoritative coming from Lloyds of London, are around $96 billion, with the global insurance bill being guestimated at $50 billion. That figure is likely to be revised upwards, possibly sharply, in the weeks to come.

With all Japanese ports shut after the Tsunami and with massive damage to roads and railways across Japan’s north eastern coast and, in some instances, for several kilometres inland, freight distribution has been significantly affected. Sony was reported to have closed eight plants while it waited for components and products to refresh stock at those plants. Similar stories are bound to be unfolding at numerous other Japanese companies. However, markets are generally pretty efficient at finding ways around this kind of supply chain disruption so damage to output from distribution issues may well be limited and of short duration.

Against this idea of a rapid recovery one has to set video footage and aerial photographic evidence of whole clusters of houses, factories and shops being scoured back to mud flats by the force of the tsunami. Japanese builders have learned a great deal about how to build houses to withstand earthquakes, and tremendous progress has been made since Kobe, when most of the 5,000 deaths that occurred happened when wooden houses with heavy clay tiled roofs collapsed on the occupants. Yet none of the new building to new seismic regulations counted for much in the face of the tremendous weight of water and the mountain of advancing flotsam swept along with it. The wave was said to have been travelling inland at speeds in excess of 60 miles an hour, sweeping houses, cars and trucks along on its front edge like an immense battering ram.

Despite that early guestimate of the final bill made by Lloyds of London, there are still huge imponderables about the final cost the country, and the global economy, is likely to face. At the time of going to press the situation at several of Japan’s nuclear reactors was giving cause for grave concern and Tokyo and other cities were experiencing rolling power outages. None of the containment vessels had been breached at the affected reactors, but it seems likely that some core meltdown has occurred. A massive radiation leak would create an additional damage multiplier, the cost of which will be difficult to assess in the short term, but could run off the scale.

Globally, the first stocks to be impacted by the disaster were the major insurers. Companies like Munich Re and Lloyds of London are in the firing line here. But then, in a left-handed kind of way, disasters are grist to the insurance companies’ mills. What they lose on the swings, they make up on the roundabouts. Being seen to pay out big time on disasters is nothing if not excellent PR for insurers. It costs them and their investors dearly, but it is bread on the waters for the future and if they really get hammered, they simply pass the pain on to next year’s clients through a steep increase in premiums. Here’s Munich Re’s take on the disaster:

“Following the devastating earthquake and tsunami in Japan, Munich Re will use not only its experience and financial strength but also its familiarity with local conditions established over many decades to help the country recover from this exceptional natural catastrophe. In view of the complexity and severity of this particular event, it will take some considerable time to determine even approximately the overall economic loss as well as the loss amounts payable by individual reinsurers such as Munich Re.”

Insurers are “the good guys” in the aftermath of a disaster on this scale. They provide the funds to businesses and ordinary folk that allow them to regroup and rebuild. The Japanese government has been attempting to stimulate the economy through quantitative easing. It now has to spend on a truly grand scale to rebuild much of the country’s north east coast. Perhaps the gravest current concern, alongside the continuing nuclear hazard, is the warning from some geologists that the present quake could shift stresses to other tectonic plates such as the one affecting Tokyo bay. Another major quake in the next few days is a possibility, they warn.

The problems with Japan’s ageing nuclear reactors are already causing a rethink in some countries. The Daily Telegraph reported Germany’s Foreign Minister, Guido Westerwelle saying that a government decision to extend the life of several of the country’s nuclear power stations is likely to be reviewed. In an earlier blog we looked at the potential of fusion power as a replacement for nuclear. If this was to get more attention, and vastly more funding, as a result of the question marks raised over the nuclear industry by the Japanese earthquake, that could, ultimately, be one of the most positive things to come out of this disaster. If a fusion reactor fails, you get a tremendous transfer of heat from the plasma to the container, which will turn to liquid metal on the instant. That would be tough for the investors, who would lose around 10 billion euros, but it doesn’t mean a thing for the environment once the metal slag has been removed from the site. This point is seriously worth governments focusing a little time on.

Further reading on insurance and the Japanese economy:


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