Analysis/Comment Japan: The economic consequences of Disaster; Nuclear crisis moves closer toward catastrophe; Nikkei falls 10.5%
By Finfacts and Professor Peter Morici
Mar 15, 2011 - 6:13 AM
Japanese Prime Minister Naoto Kan addresses the stricken nation on Tuesday, March 15, 2011.
Japan: The economic consequences of the massive
earthquake last Friday off the coast of Japan are taking a backseat as the
crisis at two nuclear plants is moving closer to catastrophe. On the Tokyo Stock
Exchange, the Nikkei 225 closed down 10.5% Tuesday.
An explosion Tuesday, damaged the vessel
containing the nuclear core at one reactor and a fire at another is spreading
large amounts of radioactive material into the air, according to the statements
from the Japanese government.
The prevailing winds are moving most of the
radioactivity plume out over the Pacific Ocean, rather than over populated areas
but workers have been withdrawn from the site of
Tuesday's explosion, which must be a huge worry for the population in the
greater area .
Japanese Prime Minister Naoto Kan said Tuesday that there is a high risk of
elevated levels of radiation from a reactor at the Fukushima nuclear power plant
and he urged people within 30 kilometers of the plant to stay indoors.
"Substantial amounts of radiation are leaking in the area," Kan said on
television at 11 a.m. in Tokyo. "We are making utmost efforts to prevent
further explosions or the release of radioactive materials," he said.
Comment by Dr. Peter Morici on the
The toll in human misery wrought by the tsunami and earthquakes in Japan test
the imagination of economists but the effects on Japan’s GDP and wealth are a
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, but will
then surge as construction and spending on capital equipment to rebuild drives
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—those include physical assets like those just noted and
financial wealth, namely securities and cash. Rebuilding will run down Japan’s
financial wealth to replace lost physical assets.
As estimates of the damage emerge, those totals are real deadweight 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 one percent of GDP in large advanced
Replacing lost production and rebuilding lifts output in a nation’s geographic
areas less affected by the disaster to provide the resources to rebuild and
compensate for lost output in the most affected region.
However, this time could be different. Japan has encountered two disasters—the
tsunami and earthquake, and the nuclear explosions—and globalization may make
Japan more vulnerable rather than in the past.
The double whammy has the potential to 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 now are good substitutes
for Toyota’s cars, and even more so, Caterpillar tractors made in China can
replace Komatsu’s land movers.
The pause and uncertainty effected by the nuclear shut down 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 permanently 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
the grip of oil 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, the path of recovery
will be inexorably altered.
John Rothfield, senior director, Australia economics at Merrill Lynch, assesses Japan's response to its worsening nuclear crisis:
Ryoji Musha, president of Musha Research, says further currency intervention by the Bank of Japan is possible:
Professor, Robert H. Smith School of Business, University of Maryland,