Japan’s earthquake and its economic impact

Author: Peter Drysdale

The economic aftershocks of the earthquake and tsunami which struck Japan on Friday are only slightly less difficult to fathom than the scale of the human tragedy and physical devastation.

This massive event was bigger than the Great Hanshin quake that devastated Kobe in 1995. Its economic impact may be less severe. The 1995 earthquake ranked among the most economically costly of modern earthquake disasters. With a magnitude of 6.9 it struck directly under a large modern urban area, killing more than 6,500 people, knocking out communications, highways, railways, water and other essential infrastructure, destroying over 150,000 buildings and damaging 180,000 more, with over 600,000 made homeless. In terms of loss of life there have been many worse disasters in China, Russia and South Asia. But the damage to physical capital stock in Kobe was US$114 billion, 2.3 per cent of Japan’s GDP and around 0.8 per cent of Japan’s physical capital stock at the time — fully three times the recorded cost of any disaster in history.

Most observers at the time thought that it would take at least ten years to get Kobe back to working order. The economic hit was variously estimated at up to 10 per cent of Japanese GDP. Less than eighteen months later, in fact, manufacturing output in the Kobe region reached 98 per cent of pre-quake levels. Only a year later, exports were running at 85 per cent of pre-quake volumes. Two years after the quake, all debris had been removed — a colossal achievement — and all the infrastructure restored. The stock market took a dive (down 7.5 per cent in the days following Kobe; the futures index was down 2 per cent after Sendai) but GDP slowed only little and over the ensuing two years kicked up, in part because of Kobe’s reconstruction and investment in modernisation.

Making the gruesome calculations for loss of human capital as well as physical capital, loss of capital stock in the Kobe quake is calculated to have been US$127 billion or a miniscule 0.08 per cent of all Japan’ s physical and human assets at the time.

Post-quake Kobe was very different from Kobe before the quake. The city has been re-engineered, providing excellent urban infrastructure and greater insulation against future shocks. The lessons learned from Kobe about the risks from poor infrastructure engineering (highways, water, sewerage, transport and communications) have been steadily applied in the major conurbations across Japan. Visitors to Tokyo will have noticed the painstaking reinforcements being put in place to its highway system over the last 15 years — one reason it withstood Friday’s violent shake so well.

These achievements are testimony to human resilience, but particular testimony to the resilience and capacity of the Japanese people — not only their remarkable capacity to face natural calamity stoically but the human capital, skills and organisational know-how they bring to dealing with it on a grand scale and with great efficiency.

This national character is on full display now.

At magnitude 8.9, the Sendai quake was 178 times bigger than Kobe. The 10-metre tsunami wreaked its independent, terrifying destruction. Trains, trucks, cars, boats, buildings and infrastructure were all swept away. It will be a miracle if the death toll is lower than Kobe’s. This is not the Tokyo ‘big one.’ Tokyo also withstood a major buffeting but is already back in business.

The Sendai region is less important economically and industrially that Kobe, all up accounting for perhaps less than 2 per cent of Japanese GDP. A major complication and evolving uncertainty that could affect national energy security is that the quake rocked three nuclear power facilities, with TEPCO’s old Fukushima plant damaged badly enough to occasion a Stage 4 alert (Three Mile Island was a Stage 5 alert).

The national government and Self Defence Forces have swung into action much more expeditiously than after Kobe (which occasioned a drawn-out constitutional debate about whether the SDF could be deployed for civil defence and resulted in reforms which strengthen the capacity of Japan’s executive to respond to emergencies decisively). Both civilian and emergency services are displaying their remarkable effectiveness in coping with these disasters. International assistance has been forthcoming and accepted rapidly.

The immediate response of Prime Minister Kan and the national agencies to the crisis has diverted attention from the looming political meltdown of his DPJ government, and could restore some measure of confidence in national leadership that the country now so badly needs.

Peter Drysdale is Head of the East Asia Forum and East Asia Bureau of Economic Research in the Crawford School at the Australian National University. This essay has also been published in the Australian Financial Review, Monday, 14 March 2011.