Franz WALDENBERGER & Jens EILKER
The Economic Impact of the Tohoku Earthquake
1. A threefold catastrophe
On March 11, 2011 one of the strongest earthquakes ever measured occurred 130 km off the coast of Japan’s main island Honshu. Its intensity was 1,400 times stronger than that of the Kobe earthquake in 1995. The earthquake triggered a number of tsunami, with waves reaching up to 18 meters of height. They reached the coasts of North-East Honshu within an hour and devastated an area of around 500 sqm. More than 90% of those who are dead or missing are victims of the tsunami. The tsunami also severely damaged three reactors of the power plant Fukushima Daiichi. The following meltdowns caused the release of radioactivity and resulted in evacuations of the local population. The triple catastrophe is the worst Japan has been confronting since the Second World War.
Considering the number of casualties, damaged buildings and infrastructure, the most affected prefectures were Iwate, Miyagi and Fukushima. The three prefectures account for 9.5 per cent of Japan’s land area, 4.5 per cent of its population and 4 per cent of its GDP. Income per capita is 14 per cent below the nation’s average. The prefectures provide the country with agricultural, forestry and fishery products, processed food, precision devices, electronic equipment and paper. In addition, Fukushima supplies Tokyo with electricity.
2. Economic Impact
2.1 Direct Losses through Damages
On June 20, the Japanese Government released a detailed damage estimate, summing up to 16.9 trillion yen or 3.5 per cent of GDP (cf. Table 1). In comparison, the Kobe earthquake of 1995 resulted in total damages of 9.6 trillion yen or 1.9 per cent of GDP. On the assumption that 90 per cent of the damage is attributable to the affected regions which contribute around 4 per cent to GDP and given that the value of physical assets is about five to six times of GDP, it can be inferred that between 13 and 16 per cent of assets must have been destroyed in the most affected regions.
2.2 Impacts on the Overall Economy
- Revisions of GDP estimates -
Table 1a and 1b show the revised growth estimates of the Bank of Japan and the OECD on Japan’s real GDP for the fiscal years 2010 to 2012 and the calendar years 2010 to 2012 respectively. Transforming the Bank of Japan’s figures into calendar years, estimates result in a loss of 4.7 trillion yen for 2011 and in a gain of 1.3 trillion yen for 2012. Discounting the 2012 estimate by 1.01, a net present income loss of 3.5 trillion yen derives for the whole two-year period. For the OECD, the net present income loss would be 5.9 trillion yen. The average of both is 4.7 trillion yen or about 1% of GDP. The forecasted overall loss implies that neither the Bank of Japan nor the OECD assume that reconstruction will fully compensate the immediate income losses, at least not by 2012. This is surprising and probably too pessimistic given the amount of damages incurred and the efforts needed to clear up the debris.
Table 1: Revised real GDP growth estimates
a) Bank of Japan
- Domestic production slump, but stable consumer demand -
Industrial production fell 15.5 per cent in March compared to the previous month. In April, production levels slightly recovered and continued to improve in the two following months. However, production in June was still 5 per cent below the output level of February. Manufactures of cars, trucks and motorbikes were hit hardest. Their output in March and April was down by 50 per cent compared to February. In June it was still 15% below the February level.
The sharp decline in industrial activity was mainly caused by interruptions of supply chains. This is confirmed by the fact, that production shortages were accompanied by significantly lower production capacity utilization rates. In March utilization rates dropped by 22 per cent without recovering in April; in May they were still 12 per cent below the level of February.
Consumer sentiment deteriorated in March and May. The corresponding consumer climate index fell in April by 18 per cent compared to the previous month; it then gained strength during the following months but was still 10 per cent below the February level in July. Concerns stemmed from the employment situation. However, compared to fluctuations in production, employment remained rather stable with only slight changes in the unemployment rate, thereby supporting consumer demands.
- Strong short-term fluctuations of imports and exports -
The catastrophe had immediate effects on foreign trade (Table 2). Exports plunged mainly because of supply shortfalls, but partly also due to concerns about products being contaminated by radioactivity. As for imports, domestic production shortfalls reduced demand for foreign primary products, while domestic supply shortages led to additional imports of substitute products. Table 2 also shows strong variations across regions and type of traded goods.
Table 2: Development of imports and exports by region and type of commodity
Severe impacts were also felt in Japan’s tourist industry. The number of Japanese traveling abroad declined between 8 and 9 per cent from March to May and 3 per cent in June. However, these developments were rather moderate in contrast to the dramatic plunge in the number of visitors coming to Japan: from March to May the number of foreign visitors declined 50 to 60 per cent compared with the same period in 2010. In June, it was still 36 per cent below the level of the year before.
- Surprisingly fast reconstruction -
Despite all the criticism of the government for managing the crisis, the achievements for stemming the catastrophe and the efforts in reconstruction are enormous. Presently, all 13 airports are back to operation. Most of the transport routes and telecommunication networks were reestablished in a considerable short period of time. Almost all households are again reconnected to water, electricity and gas supply networks. Evacuation camps that at the peak hosted more 100,000 people will soon be cleared as evacuees will move into temporary housing facilities.
Japan’s industry also reacted enormously fast. According to a survey conveyed by METI in the second half of June, 80 per cent of the asked companies had reached the productions levels as of before the catastrophe. 70 per cent of the residual companies were estimating to be back in full production, until the end of 2011.
Reconstruction should result in strong additional demand. The Japanese construction industry will profit most. Construction machine shipments were already 20 per cent higher in May than a year before. The construction industry itself received 25.5 per cent more orders compared to May 2010.
- Uncertainties remain with regard to the electricity supply and effects from radiation -
Official sources expect industrial production to be back to pre-quake levels by the end of September. Nevertheless, serious challenges and uncertainties still persist with regard to the electricity supply and radioactive contamination.
The destruction of nuclear power plants in Fukushima and Onagawa affected 20 per cent of the electricity supply capacity of TEPCO and Tohoku Electric. Since both companies account for 40 per cent of the nationwide capacity, 8 per cent of Japan’s electricity supply has been lost. Overcapacities in the West of Japan cannot be used as the power grids in West and East Japan use different electricity frequencies! Therefore, the Kanto and Tohoku regions, which account for 40 per cent of the country’s economic performance, have to get by with an electric capacity which is 20 per cent lower than before the catastrophe. However, although electricity demand is highest during July and August, no blackouts occurred. Combined efforts by the public, corporate and private sector reduced electricity demand by more than 15%, thus almost offsetting the decline in supply capacity.
Japan’s 54 nuclear power plants are regularly shut down for maintenance purposes. Their re-start has to be approved by the governor of the respective prefecture. Because of growing fears about the safety of nuclear energy, approvals are becoming a difficult matter. Utilities in Kyushu and Niigata already feel the public resistance as governors refuse approvals. The West of Japan might therefore also experience electricity constraints in the near future.
The nuclear catastrophe also generated fears about contaminated products. 30 per cent of companies, which were surveyed by METI, reported that foreign customers canceled orders due to concerns over contamination. Despite those reactions the overall implications for the food industry have so far been rather moderate. In March production dropped by around 9 per cent. In April food production rose by 7 per cent and almost returned to the level of February.
On the way to a lasting solution TEPCO is still facing difficult challenges. Radiation leaking from the reactors and contaminated debris complicate the achievement of a “cold shutdown” by January 2012.
2.3 Financial Impacts
It seems unlikely that the catastrophe will put the national or international financial system under pressures strong enough to have negative repercussions on the real economy.
From March to July 258 companies went bankrupt as a direct or indirect consequence of the disaster. This is higher than the 102 companies that had to give up during the first four months after the Kobe earthquake in 1995. Until the end of July unpaid liabilities summed up to 129 billion yen, causing the banking sector to express concerns. However, the figures started to decline in July. Neither the Bank of Japan nor the Financial Service Agency see serious threats for the banking system.
The Japanese government expects the financial burden from reconstruction to amount to 23 trillion yen within the next 10 years, with 80 per cent being due in the first five years. This would be twice as high as the costs of the Kobe earthquake. More than half of the expenses are to be funded through tax increases, spending cuts and selling off governmental shares in listed companies.
There were concerns that Japan would dissolve its foreign assets in order to finance domestic reconstructions, thus triggering an appreciation of the yen. This in turn would have caused difficulties to East-Asian states in servicing yen denominated debt. The development of the real effective exchange rate however does not indicate that the yen is currently overvalued. Latest appreciations against the euro and the US dollar are not caused by the disaster, but rather by uncertainties surrounding the international currency system.
3. Who is to pay?
Although the catastrophe in Japan might turn out as the most expensive since disasters have been recorded, the burden for the insurance industry will likely be lower than in the case of the hurricane Katrina in 2005. The main reason is to be found in the low proportion of individuals with earthquake insurance in Japan. At the end of March 2010, only 23 per cent of all private households were insured. In Miyagi the corresponding figure was 33 per cent, in Fukushima and Iwate it was a low 14 and 12 per cent respectively.
On April 15, the Japanese government urged TEPCO to pay compensation to those individuals, who had to be evacuated due to radioactive contaminations. At the end of May, payments were also made to the agricultural and forestry industry, as well as fisheries, whose products were banned from the market because of radioactive contamination. On August 3, the parliament passed a bill for setting up a fund from which TEPCO can settle further payments. The bill also stipulates financial contributions by other energy companies to the fund.
Right after the earthquake the Japanese government provided financial aid to individuals, families and troubled companies. On May 2 the parliament passed the first supplementary budget for fiscal year 2011. Among others it intended to shoulder the restorations of destroyed infrastructure and public facilities, the removal of debris as well as the provision of temporary housing. To maintain the confidence of the financial markets, the budget was not financed through the issuance of additional bonds, but by spending cuts. On July 25 a second supplementary budget was decided. Soon, negotiations for a third extra budget will be started. It will be by far the largest with an expected volume of 10 trillion yen.
The Japanese government received donations from 91 nations and organizations. Aid organizations like the Red Cross Society of Japan made remarkable efforts to help victims and to support the recovery. Also, a large number of volunteer helpers joined in. Until the mid of June 573,000 people were assigned by local community centers.
If the estimates of property damages as well as income losses are contrasted with the above-mentioned amounts shouldered by the insurance industry, TEPCO, donors and the Japanese government, those directly affected will on average have to come up for about 23 per cent of the overall losses. The main burden is taken over by the government (Table 3).
Table 3: Estimated distribution of costs
4. The triple disaster as a “crash-test”
Disasters and crises can be understood as crash tests. Putting a system under extreme pressures reveals the strengths and weaknesses of underlying structures. In a similar way, the triple disaster revealed the strengths and weaknesses of Japan.
- Strengths –
(1) In the midst of consternation about the devastations from the tsunami and fears about radiation, the impressive robustness of Japan’s buildings, utility networks and transport infrastructure that resisted the massive earthquake went almost unnoticed.
(2) Similarly, the resilience of the Japanese people in face of the disaster has been admirable. There were no reports of mass panics.
(3) Survivors could count on effective neighborhood support.
(4) The corporate and public sector immediately mobilized enormous resources for rescue, lifeline support and recovery.
(5) In an amazingly short time, the infrastructure and production facilities were rebuilt.
- Weaknesses -
(1) Less than one quarter of private households is insured against earthquake risk. Although the number of insurance policies increased by 14.5 per cent during the months following the disaster the government must analyze the reasons behind the weak nationwide coverage.
(2) Japan must take precautions against the risk that a similarly strong quake hits Tokyo directly. The most important measure to be taken is de-concentration of political and corporate headquarter functions. The issue has been on the political agenda for decades. Now concrete steps need to be taken.
(3) Residential and industrial areas need to be better protected against Tsunami risks. Such risks must be reflected in urban planning.
(4a) The safety of nuclear power plants must be re-addressed and the future of nuclear power as a “safe” energy must be reconsidered. Pulling out from nuclear energy altogether does not seem to be feasible in the near future. But more efforts must be put in the promotion of renewable energies. The recently passed Renewable Energy Bill points in the right direction. Public-private partnerships offer another venue. Softbank CEO Masayoshi Son took a lead when he announced large co-investments in regional solar projects.
(4b) The nuclear industry needs a more effective governance structure. As a first measure, the Nuclear and Industry Safety Agency will be moved to the Ministry of the Environment. It used to be under the jurisdiction of METI that was also responsible for the promotion of nuclear energy, resulting in a clear conflict of interest.
(4c) However, effective governance also requires expertise and access to information independent from industry experts. Japan is still lacking such expertise. Inviting NGOs would be one solution to overcome the deficit.
(4d) Despite its leading position in the robot technology, Japan had no robot model able to work within the contaminated power plants. It was similarly lacking technology to cope with radioactive contamination.
(5) Risk communication after the disaster was extremely poor. Especially the government and TEPCO tried to hide bad news. Risk communication requires, that risks are properly communicated in a way that stakeholders know how to react. Trust can only be gained by allowing neutral observers access to relevant information.
The nuclear disaster and the lack of effective communication seriously damaged Japan’s reputation as a leading high-tech country with high quality standards. Rebuilding trust is most essential for Japan’s future. The fears of domestic and foreign consumers and tourists, as wells as the concerns of foreign workers and investors can only be lowered through comprehensive testing for radioactivity, carried out or at least certified by independent third parties. The test results must then be effectively communicated. A comprehensive communication policy also requires a government that is able to truly represent the interests of Japan towards the outside.
This is an abridged English version of the article “Das Tohoku Erdbeben – Wirtschaftliche Auswirkungen” which will be published this autumn in „JAPAN 2011. POLITIK, WIRTSCHAFT UND GESELLSCHAFT“; David Chiavacci and Iris Wieczorek (Publ.); VSJF, Berlin, 2001