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Parsing The Economic Impact Of The Japanese Disaster

Jeremy Bogaisky
This article is more than 10 years old.

uncaptionedAfter getting walloped by the largest earthquake ever recorded in the country and a massive tsunami, and with a sizable proportion of its power generating capacity knocked offline, Japan is facing tremendous challenges.

What's The Damage And Whither The Economy?

Citi Investment Research analysts estimate that the total damage to structures will fall in a range of $60 billion to $120 billion, roughly comparable to the Kobe earthquake in 1995.

In the short run, industrial production has been severely impacted across a broad range of industries: the world's largest automaker, Toyota, said Monday that a halt to assembly lines through Tuesday would cut output by 40,000 vehicles. GDP is all but certain to contract in the second quarter. But given the speed with which the Japanese economy bounced back from the Kobe earthquake, analysts are generally optimistic that the country will return to growth in the second half of this year.

"As with the Kobe earthquake, operating rates at manufacturing facilities have been relatively low, making it comparatively easy for companies to shift production to sites unaffected by the disaster," Nomura Securities economists Takahide Kiuchi and Kohei Okazaki write in a research note.

Rebuilding is expected to provide a major boost to GDP, though pace the parable of the broken window, the statistics may mask the economic damage.

Companies that stand to benefit: Japanese construction equipment maker Komatsu and its U.S. compatriot Caterpillar; engineering and construction companies like Fluor;  steel and cement makers.


With 11 nuclear reactors out of action in the wake of the quake and rolling blackouts going into effect in the Kanto region, disruption to power supplies is a major wild card in the near and medium term.

Japanese trading houses and the government have been working to secure fuel for utilities' spare generators to make up for the shortfall; there were reports over the weekend that Russia may boost shipments of liquefied natural gas and coal.

Based partly on California's experience with rolling power cuts in 2003, during which manufacturers were largely able to cope with the downtime,  Nomura estimates that if the power cuts extend through April, the negative impact will amount to 0.29% of GDP.

The Japanese government set a goal last year of increasing the share of zero-emission power sources from 34% to 70% by 2030, with nuclear power a key contributor: Plans call for constructing 14 new reactors nationwide in the next 20 years. Given the traumatic events involving Tepco's Fukushima nuclear reactors, there's a good chance that the public will demand a different approach--and not only in Japan.

Expect Japan to build more power plants fueled by liquefied natural gas. Japan is already the world's largest importer of LNG; it's likely to put upward pressure on prices in years to come.

Losers are likely to be nuclear plant builders like Hitachi, Toshiba and Areva, as well as uranium miners like Cameco.

Who's Going To Pay?

The Japanese government is going to have to fund a massive rebuilding program, but with a national debt that's already swollen to roughly 200% of GDP, could this be the straw that breaks investor confidence?

After cutting the country's debt rating outlook to negative last month, Moody's indicated Sunday it viewed any fiscal impact from reconstruction as likely temporary:  "A large and wealthy country's government should be able to cope with localized natural disasters," said Tom Byrne, Moody's lead analyst for Japan. Nonetheless, he warned that it was critical for the government to show progress in reining in the ballooning deficit in the medium term.

Nomura estimates the government could spend  as much as $600 billion on reconstruction. Feuding between the governing Democratic Party of Japan and the opposition has held up the passage of the fiscal 2011 budget; expect the disaster to lead them to pull together and take care of business.

Investors sent mixed signals Monday at the prospects of higher government spending:  yields fell on Japanese government bonds, except at the longer end of the curve; meanwhile the cost of insuring against default on JGBs surged.

U.S. Treasuries could conceivably suffer if the Japanese government and insurers sell their substantial holding to fund rebuilding and cover insurance costs.

Insurers could get off comparatively lightly compared to a similar catastrophe in other developed countries. Japan is considered to be relatively underinsured, with fewer than half of households covered by earthquake insurance due to high costs. Nonetheless, given the scale of the disaster, Japanese insurers like Tokio Marine Holdings and global reinsurers could face a hit of $34 billion from the quake alone, according to AIR Worldwide.

In my 14 years at Forbes I've helped direct our coverage of everything from Asia to autos and healthcare to housing. Right now I help manage our breaking news team and

In my 14 years at Forbes I've helped direct our coverage of everything from Asia to autos and healthcare to housing. Right now I help manage our breaking news team and write about aerospace and defense. Send tips to jbogaisky[at]