Japan: The economic consequences of disaster

Rebuilding will run down the stricken nation's financial wealth to replace lost physical assets.

By TheStreet Staff Mar 14, 2011 10:45AM

Image: Japan (© Stockbyte/SuperStock)By Peter Morici, TheStreet

 

The toll in human misery wrought by the tsunami and earthquakes in Japan tests the imagination of economists, but the effects on Japan's GDP and wealth are a different matter.

 

GDP, which measures goods and services produced, will immediately dive in Japan and stay lower through the second and into the third quarters of 2011. Then it will surge as construction and spending on capital equipment to rebuild drive up growth.

 

Overall, however, Japan will be poorer for this disaster. Lost infrastructure, factories and the like will be replaced, but wealth is the sum of what citizens and governments own -- including physical assets like those just noted and financial wealth such as securities and cash. Rebuilding will run down Japan's financial wealth to replace lost physical assets.

 

Post continues after video:

 

As estimates of the damage emerge, those totals are real dead-weight losses to wealth. To the extent Japan must run down financial assets and bring home foreign investment to rebuild, the net wealth of Japan is permanently reduced.

Generally, after three years or so, the impact on GDP is small -- production is lost in the first two quarters, but more goods and services are produced in later quarters to rebuild. Often the net loss in GDP, from even the largest natural disasters, comes to no more than 1% of GDP in large advanced industrialized countries.

 

Replacing lost production and rebuilding lift output in a nation's geographic areas less affected by the disaster, providing the resources to rebuild and compensate for lost output in the most affected region.

 

However, this time could be different. Japan has encountered multiple disasters -- the earthquake, tsunami and nuclear explosions -- and globalization may make Japan more vulnerable than in the past.

 

The double whammy could keep the Japanese economy shut down longer, and globalization offers Japan's export customers alternatives they might not have enjoyed a decade or two ago. Hyundai and Ford (F) now are good substitutes for Toyota's (TM) cars, and even more so, Caterpillar (CAT) tractors made in China can replace Komatsu's land movers.

The pause and uncertainty effected by the nuclear shutdown will cause production to rev up more outside Japan and take longer to return to full capacity inside the country. Longer term, the nuclear disaster will accelerate the implosion of Japan's economy caused by an aging population, just as Hurricane Katrina caused people and activities to permanently leave more economically depressed areas of the Gulf Region for faster growing places in the United States.

 

Some of New Orleans' and Mississippi's lost capital will never be restored -- it went elsewhere in the United States. For Japan's disaster-stricken economy, that elsewhere may be other places around the world.

 

For the global economy, the nuclear disaster in Japan will cause more delay in reducing dependence on oil from the politically volatile Middle East. Wind, solar and other alternatives hold great promise, but nuclear still offers the safest large-scale option around.


The problem is the loss of life associated with nuclear failures gets concentrated, even if it is much smaller over time per BTU produced, at events like Fukushima. That latter will increase hesitation around the world about building nuclear plants and keep the global economy in oil's grip longer.

 

This time, the path to recovery will be tougher for Japan, and for the global economy, ripped by the Great Recession and high-priced oil.

 

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1Comment
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Hmmm Japan owes twice it's GDP pretty much this means Japan will be totally broke after this. It has to buy lots of food as it's farmland is now wasted with salt. It's going to take decades to get the salt out of their farm land now and at a huge cost per square foot.

Japan will sink this year to fifth largest economy and leveling off at about number ten in a few years.
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