Franz Waldenberger

No. 82 DECEMBER 2011

Abstract The Japanese Economy after the Tohoku Earthquake

The economic cost of the triple disaster of March 11 is estimated to amount to less than 5% of Japanese GDP.

A threefold catastrophe On March 11, 2011 one of the strongest earthquakes ever measured occurred 130 km off the coast of Japans main island Honshu. Its intensity was 1,400 times stronger than that of the Kobe earthquake in 1995. The earthquake triggered a tsunami, with waves reaching up to 18 meters of height 1. They reached the coasts of North East Honshu within an hour and devastated an area of around 500 square kilometers. The tsunami also severely damaged three reactors of the power plant Fukushima Daiichi 2. 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 Japans land area, 4.5 per cent of its population (in the year of 2009) and 4 per cent of its GDP (2008). In 2008 productivity was 12 and income per capita was 14 per cent below the nations 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 3.

The speed of Japans recovery is impressive. However, the disaster revealed severe weaknesses in governance and risk communication. It also forces Japan to reconsider and restructure its energy policies.

Franz Waldenberger, Professor at the Japan-Centre of the Ludwig-MaximiliansUniversity in Munich, Germany, presently with Tsukuba University (Tokyo Campus) Japan and Jens Eilker, Research and Teaching Assistant, Master and Doctoral Student, Ludwig-Maximilians-University, Munich, Germany.

Nikkei.com, The Great East Japan Earthquake, And After. Facts & Figures, 2011. 2 Nikkei.com, Three units had meltdowns, 30.5.2011. 3 Statistics Bureau, Results, 2010, of Population Estimates, http://www.estat.go.jp/SG1/estat/List.do?lid=000001063433; Labour Force Survey, Regional Results 2010,http://www.e-stat.go.jp/SG1/estat/OtherListE.do?bid=000000110 (*) The opinions expressed herein are 002&cycode=7; Statistics Bureau, Japan Statistical Yearbook 2011, strictly personal and do not necessarily http://www.stat.go.jp/english/data/nenkan/index.htm; Economic and Social reflect the position of ISPI. Research Institute, Kenmin Keizai Seisan [Economic Accounts of the Prefectures], 2008, http://www.esri.cao.go.jp/jp/sna/sonota/kenmin/kenmin_top.html.

ISPI - Analysis

Economic Impact Direct Losses through Damages On June 20, the Japanese government released a detailed damage estimate amounting up to 16.9 trillion yen or 3.5 per cent of GDP 4. In comparison, the Kobe earthquake of 1995 resulted in total damages of 9.6 trillion yen or 1.9 per cent of GDP 5. 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 estimated that between 13 and 16 per cent of assets have been destroyed in the most affected regions. Impact on the Macro Economy Revisions of GDP estimates Table 1a and 1b show the revised growth estimates of the Bank of Japan and the OECD on Japans real GDP for the fiscal years 2010 to 2012 and the calendar years 2010 to 2012 respectively. Transforming the Bank of Japans 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 per cent 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.
Table 1: Revised real GDP growth estimates a) Bank of Japan January 2011 April 2011 July 2011 Comparison July - January (percentage points) Loss or gain in net income (trillion yen) FY 2010 3.3% 2.8% NA -0.5 -1.7 FY 2011 1.6% 0.6% 0.4% -1.2 -4.1 FY 2012 2.0% 2.9% 2.9% 0.9 3.1

Source: Bank of Japan Bank of Japan, Outlook for Economic Activity and Prices, April 2011, http://www.boj.or.jp/en/mopo/outlook/index.htm; Bank of Japan, Minutes of the Monetary Policy Meeting on July 11 and 12, 2011, August 9, 2011, http://www.boj.or.jp/en/mopo/mpmsche_minu/index.htm/.

b) OECD 2010 December 2010 May 2011 Difference (percentage points) Loss or gain in net income (trillion yen) 3.7% 4.0% 2011 1.7% -0.9% -2.6 -8.9 2012 1.3% 2.2% 0.9 3.1

Source: OECD (Organisation for Economic Co-operation and Development), Economic Outlook No. 88, Statistical Annex, Table 1. Paris 2010; OECD, Economic Outlook No. 89, Statistical Annex, Table 1. Paris 2011.

CAO (Cabinet Office), Higashi Nihon Shinsai ni okeru Higaigaku no Suikei ni tsuite [Information on Estimates of the Damages Caused by the Great East Japan Earthquake], 2011, http://www.bousai.go.jp/oshirase/h23/110624-1kisya.pdf. 5 The City of Kobe, The Great Hanshin-Awaji Earthquake. Statistics and Restoration Progress, 2011, http://www.city.kobe.lg.jp/safety/hanshinawaji/revival/promote/january.2011.pdf.

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Domestic production slump, but stable consumer demand Overall economic activity dropped 7.2 per cent in March. Industrial production, which accounts less than 20 per cent to GDP, fell 15.5 per cent in March compared to the previous month. Manufactures of cars, trucks and motorbikes were hit hardest. Their output in March and April was down by 50 per cent as compared to February. In June it was still 15 per cent below the February level. The sharp decline was mainly caused by interruptions of supply chains 6. 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 regards 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. Fast reconstruction The reconstruction efforts were enormous, fast and largely successful. 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. Japans industry too has 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 7. Reconstruction is likely to result in strong additional demand. The Japanese construction industry will profit most. Construction machinery shipments were already 20 per cent higher in May than a year before 8. The construction industry had 25.5 per cent more orders as compared to May 2010.

METI (Ministry of Economy, Trade and Industry), Seisan, Shukka, Zaiko, Zaikoritsu Shis 2003 Nen 1 Gatsu 2011 Nen 7 Gatsu [Indices of Production, Sales and Stock, January 2003 July 2011], 2011, http://www.meti.go.jp/statistics/tyo/iip/result-2.html; METI, Zensangy katsud shis [Total Industry Economic Performance Indices], 2011, http://www.meti.go.jp/statistics/tyo/zenkatu/index.html. 7 METI, Higashi Nihon Daishinsai Ato no Sangy Jittai Kinky Chsa 2 [Survey 2 on the State of the Industry after the Great East Japan Earthquake], 2011, http://www.meti.go.jp/press/2011/08/20110801012/20110801012.html. 8 Nikkei.com, Construction Machinery Shipments Rise 20% In May, 30.6.2011.

ISPI - Analysis

However, uncertainties remain with regard to the electricity supply and decontamination. Official sources expected industrial production to be back to pre-quake levels by the end of September. The destruction of the nuclear power plants in Fukushima and Onagawa affected 20 per cent of the electricity supply capacity of TEPCO and Tohoku Electric 9 (Kono 2011). Since both companies account for 40 per cent of the nationwide capacity, 8 per cent of Japans 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 countrys economic performance, have to get by with an electric capacity which is 20 per cent lower than before the catastrophe. However, although demand is highest during July and August, no blackouts occurred due to combined efforts by the public, corporate and private sector 10.
Table 2: Development of imports and exports by region and type of commodity Exports Region USA EU East Asia Rest of the World Total Marc h -9,9 -7,6 -9,9 July April -16,5 -9,3 -2,0 May 14,1 12,4 0,1 June 15,8 10,4 6,1 4,2 2,1 2,5 -4,4 0,3 Marc h -9,7 -10,8 0,8 -5,6 -1,5 April 13,7 20,1 -0,7 Imports July May 3,7 -5,4 2,4 June -7,6 1,1 2,0 1,7 1,3 4,0 1,1 1,9 Jul y 2,6

Commodity Intermediate products Vehicles

-11,9 -9,2 13,8 14,4 -8,0 -7,0 4,5 8,5 Exports Marc Apr Ma Juh il y June ly -6,5 4,6 32, 3 26, 7 -7,8 2,0 -6,6 34, 1 25, 7 6,4 2,8 -2,3 2,5

-26,6 Consumer goods -11,3 IT products 0,6 Capital goods -5,6

34,5

8,4

Commodity Raw materials Intermediate products Foodstuff

3,1 2,9 -0,8 1,8 3,2 0,2 Imports Marc Apr Ma Jun h il y e -5,0 1,5 1,6 1,0

3,0

8,9 13, 0 -3,2 0,0 2,9 1,8

0,4

-4,1

3,2

32,4 2,9 3,5

7,2 3,0 -4,9 Capital goods Total Consumer goods IT products

-4,9 -7,3 -3,4 -2,7 -1,5

-1,7 1,0 4,8 2,8 3,3

-2,8 11, 2 1,2 -0,1 0,2

-2,3 -0,9 5,3 3,2 1,9

Total

-8,0

-7,0

4,5

8,5

0,3

Real changes to the previous month, in %.

Source: Bank of Japan Bank of Japan, Monthly Report on Recent Economic and Financial Developments, July 2011, http://www.boj.or.jp/en/mopo/gp_2011/gp1107b.pdf; Bank of Japan, Monthly Report on Recent Economic and Financial Developments, August 2011, http://www.boj.or.jp/en/mopo/gp_2011/gp1108b.pdf; Bank of Japan, Monthly Report on Recent Economic and Financial Developments, September 2011, http://www.boj.or.jp/en/mopo/gp_2011/gp1109b.pdf.

Japans 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

R. KONO, Future Economic Scenarios for Quake-hit Japan, in Keizai Koho Center (ed.), Japan Economic Currents, 78, April 2011, pp. 1-8. 10 Nikkei.com, Mandatory Power Cuts For Tepco Customers To End 2 Weeks Early, 30.8.2011.

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safety of nuclear energy, approvals are becoming a difficult matter. Utilities in Kyushu and Niigata already feel the public resistance as governors refuse approvals 11. 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 12. 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 METI 13. Financial Impact 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 August 320 companies went bankrupt as a direct or indirect consequence of the disaster. This is higher than the 123 companies which went bankrupt during the first four months after the Kobe earthquake in 199514. Until the end of August, unpaid liabilities amounted to 605 billion yen. However, neither the Bank of Japan nor the Financial Service Agency see lasting 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 15. 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 the selling off governmental shares in listed companies 16. The remaining funds will be raised by the issuing so-called reconstruction bonds. Who is paying? The burden for the Japanese insurance industry will likely be lower than in the case of the hurricane Katrina in 2005. The main reason can be identified in the low proportion of individuals equipped with earthquake insurances in Japan. At the end of March 2010, only 23 per cent of all private households were insured 17. 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 18. At the end of May, payments were also made to the agricultural and forestry and fishery industries 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 19. The government estimates that compensation will amount to 3.5 trillion yen 20.

Yomiuri Online (30.6.2011), Genkai mayor OK's restart of N-reactors / Saga governor maintains cautious view, 30.6.2011; Nikkei.com, FT: Japan's 'Can-Do' Bid For A Nuclear-Free Era, 12.8.2011. 12 Japan Times, They already lost homes, boats. Now they may not be able to fish, 7.4.2011. 13 METI, Seisan, Shukka, Zaiko, ,Zaikoritsu Shis 2003 Nen 1 Gatsu 2011 Nen 7 Gatsu, cit. 14 th Teikoku Databank, Dai 9kai: Higashinihon Daishinsai Kanren Tsan no Dk Chsa [9 Survey on the Development of Bankruptcies Resulting from the Great East Japan Earthquake], 2011, http://www.tdb.co.jp/report/watching/ press/pdf/p110901.pdf. 15 Nikkei.com, Reconstruction spending projected at Y23tln, 22.7.2011. 16 Nikkei.com, Government discusses 10tln Yen tax hike for reconstruction, 26.7.2011. 17 Yomiuri Online, (20.3.2011), Jishin Hoken d Hosh sareru? [How does the Earthquake Insurance protect?], 20.3.2011. 18 TEPCO (Tokyo Electric Power Company), Payment of Temporary Compensation for Damages Caused by Evacuation, 2011, http://www.tepco.co.jp/en/press/corp-com/release/11041501-e.html. 19 Nikkei.com, Diet passes Tepco compensation support law, 8.8.2011. 20 Nikkei.com, Nuclear Compensation To Cost Upward Of Y3tln, 27.9.2011.

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ISPI - Analysis

Immediately after the earthquake the Japanese government provided financial aid to individuals, families and troubled companies. On May 2, the Japanese parliament passed the first supplementary budget for fiscal year 2011. To maintain the confidence of the financial markets, the budget was not financed through the issuance of additional bonds, but by spending cuts 21. On July 25, a second supplementary budget was adopted 22. A third supplementary budget is expected to adopted toward the end of 2011. It will be by far the largest supplementary budget with an expected volume of 12 trillion yen, but only 9 billion will be dedicated to disaster relief 23. 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 11 per cent of the overall losses. The main burden is carried by the government, followed by TEPCO (Table 3).
Table 3: Estimated distribution of costs Amount Property and Life Insurances (estimated) Banking sector (defaults) TEPCO Government Donations Total (A) Damage through property losses Costs for cleanup operations (estimated) Income losses 2011 Total losses 2011 (B) Income losses for 2011 and 2012 Medium-term losses( C) Short-term difference (D) = (B) (A) Medium-term difference (E) = (C) (A) 2,295 bil. Yen 605 bil. Yen 3,500 bil. Yen 15,133 bil. Yen 308 bil. Yen 21,841 bil. Yen 16,900 bil. Yen 704 bil. Yen 6,822 bil. Yen 24,426 bil. Yen 4,670 bil. Yen 22,274 bil. Yen 2,585 bil. Yen 433 bil. Yen Share of (B) of (C) 9.4% 10.3% 2.5% 2.7% 14.3% 15.7% 62.0% 67.9% 1.3% 1.4% 89,4% 98,1%

10,6% 1,9%

Conclusions. The triple disaster as a crash-test Disasters and crises can be understood as crash tests. Putting a system under extreme pressure 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 the devastations resulting from the tsunami and fears about radiation, the impressive robustness of Japans buildings, utility networks and transport infrastructure that resisted the massive earthquake went almost unnoticed. 2. Survivors could count on effective neighborhood support.

21

H. HASHIMOTO, (2011), Heisei Nijsannen Do Hosei Yosan (Dai Ichi g) ni tsuite [The First Supplementary Budget in Fiscal Year 2011] in Fainansu, Mai, S. pp. 2-7, http://www.mof.go.jp/public_relations/finance/backnumber.htm; Ministry of Finance, Speech on Fiscal Policy by Minister of Finance Noda at the 177th Session of the National Diet, 2011, http://www.mof.go.jp/english/public_relations/statement/fiscal_policy_speech/e20110428.htm. 22 Nikkei.com, Parliament Passes Y2tln Extra Budget, PM Edges Closer To Resignation, 25.7.2011. 23 Nikkei.com, Japan To Draw Up Y12tln 3rd Extra Budget For Quake Relief, 20.10.2011.

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3. The corporate and public sector immediately mobilized enormous resources for rescue, lifeline support and recovery. 4. Infrastructure and production facilities were rebuilt very fast. 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 24. 3. Residential and industrial areas need to be better protected against tsunamis. Such risks must be reflected in urban planning. 4. 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. 4a. 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. 4b. However, effective governance also requires expertise and access to information independent from industry experts. Japan is still lacking such expertise. Inviting NGOs to make contributions could be one step towards overcoming that deficit. 4c. Despite its leading position in the robot technology, Japan had no robot model able to work within the contaminated power plants. It was also lacking technology to cope with radioactive contamination 25. 5. Risk communication after the disaster was extremely poor and inefficient. The nuclear disaster and the lack of effective communication seriously damaged Japans reputation as a leading high-tech country with high quality standards. Rebuilding trust is most essential for Japans future. In order to restore trust, comprehensive testing for radioactivity must be carried out or at least certified by independent third parties.

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R. LTZELER, Regionale Wirtschaftsstruktur und Raumordnungspolitik, in Deutsches Institut fr Japanstudien (ed.), Die Wirtschaft Japans: Strukturen zwischen Kontinuitt und Wandel, Berlin 1998, pp. 269-292. 25 Nikkei.com, Fukushima reveals Japans blind spots, 18.7.2011.