Quake-hit Japan faces a recovery and reconstruction bill of at least $180-billion, or 3 per cent of its annual economic output and more than 50 per cent higher than the total cost of 1995’s earthquake in Kobe.
Even though some extreme projections of the longer-term cost look at figures closer to $1-trillion over several years, more standard tallies akin to those used after the Kobe quake hover around this level. The world’s third-largest economy, already saddled with public debt double the size of its $5-trillion output, must rebuild its infrastructure, including roads and rail to power and ports – in a scale not seen since the Second World War.
Friday’s quake and tsunami has so far killed at least 10,000 people and struck a northeastern region which accounts for an estimated 6-8 per cent of gross domestic product, compared with around 12.4 per cent from the areas affected by the Kobe quake.
However, the loss of fixed assets and human capital from a quake which has also triggered hydrogen explosions at a nuclear power plant, looks to be far greater, at a time when oil is near a 2-1/2 year peak and other commodity prices remain elevated.
The economic damage is likely only to shave a sliver off global growth, and tens of billions of dollars in the reconstruction bill are likely to eventually help boost Japan’s economy and the Asian construction sector.
But analysts say past experience shows the cost may yet overshoot initial estimates.
“From the experiences, there is a tendency to underestimate,” said Brendan Brown, head of economic research at Mitsubishi UFJ Securities.
“There are many uncertainties – we don’t know how long power outages will last and that’s an ongoing cost, in addition to reconstruction. There is a loss of output from dislocation. If that goes on for two months, that may dwarf the cost of reconstruction.”
The Kobe earthquake is estimated to have cost $115-118 billion, or 2 per cent of GDP in 1995 terms. This time – in a still unfolding disaster – initial estimates from Credit Suisse and Barclays put the cost at $180-billion.
Mitsubishi UFJ Securities and Sarasin expect the cost could run as high as 5 per cent of GDP.
Mitsubishi’s estimates take into account a wider economic cost including a loss of tax revenues, subsidies to various industries of the affected area, loss of productivity following rolling blackouts on top of straight reconstruction costs.
Rough estimates show that replacing a nuclear power plant alone may cost $5-billion. Desperate to avert a nuclear meltdown, Japan was forced to sacrifice three of its reactors by pumping seawater to cool reactor cores.
Insured losses from Japan’s earthquake could be as high as $35-billion, even without tsunami and nuclear related losses.
Brown says historical estimates of the Tokyo earthquake of 1923 put destruction as equivalent to 50 per cent of annual economic output at the time, but the economic context was so different as to not make direct comparison very fruitful.
CAPITAL STOCK CALCULATIONS
Some estimates of the reconstruction shoot far higher than these consensus forecasts as economists take into account the potential need to replace the country’s devastated capital stock over a longer time frame.
Vanessa Rossi, senior research fellow at London-based think tank Chatham House, estimates that 10 per cent of Japan’s capital stock was lost in the earthquake, which equates to around 20 per cent of the country’s GDP, or $1-trillion.
“The bigger cost is rebuilding of capital stock. This type of problem really causes damage to capital stock. There’s enormous damage to infrastructure – installations, power plants, housing, factories, ports, coastline,” Ms. Rossi said.
“You couldn’t possibly rebuild so extensively in the period of 1-2 years. I expect it would be 4-5 years of work.”
She said Japan’s rich private sector was likely to supplement the debt-ridden government by selling its overseas assets and possibly using foreign exchange reserves, which could weigh on international markets.