Japanese Earthquake Recovery Estimates

The government of Japan has announced a preliminary estimate of earthquake damage recovery costs of 25 trillion yen ($309 billion) over three years, or about 5 percent of current GDP, double the Kobe quake and nearly four times more than Hurricane Katrina. This estimate follows on the heels of a somewhat lower estimates collected by the World Bank of $122 billion to $235 billion, and an estimate by the disaster-modeling company Risk Management Solutions, Inc. which put the costs at $200 billion to $300 billion. High Frequency Economics Ltd. has attracted attention with an extraordinary estimate of $600-800 billion.  With the nuclear situation unresolved, all these estimates should be regarded as speculative.

One heartening aspect of the current situation is how rapidly the Japanese political system has moved beyond discussions of merely expenditure switching from other public investment projects to considering cuts in current expenditures in other parts of the budget to rebuild Sendai.  Politics are still involved. The Democratic Party of Japan has floated the idea of cutting agricultural subsidies while the Liberal Democratic Party countered with cuts to child care subsidies. Nevertheless, the apparent readiness to tighten belts stands in sharp contrast to the US response of tax cuts after 9/11 and launch of the war in Afghanistan. Not all of the 5 percent of GDP costs will come from issuing new debt.

Short-term economic losses may be unusually high in this episode compared to previous natural disasters because of the power problems beyond the immediately affected earthquake zone. But these problems can be resolved by the re-establishment of power on a predictable basis initially, followed by upping capacity to pre-quake levels. This can be accomplished through three approaches. The first would be directly expanding capacity on the eastern grid by bringing some of the nuclear stations that were down for maintenance back on line more quickly than planned, (and in the longer-run adding gas-fired capacity). Second, load shifting from western Japan—though this will require investment in transformers since the two grids operate on different cycle frequencies. Third, more emphasis on and conservation.

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