The initial chaos created by the earthquake and the tsunami has subsided, at least for more distant observers, leaving one big unknown: the lasting effects on Japan’s economy.
Several organizations have issued fairly positive projections that reconstruction will trigger an economic recovery. The World Bank said in March that while Japan’s GDP could slow by as much as half a percentage point in 2011, economic growth should pick up in the second half of the year as reconstruction accelerates. The Bank of East Asia also forecast that post-quake reconstruction will stimulate the economy in the longer run.
Perhaps in anticipation, the Nikkei 225 has recovered about half of its value since plunging nearly 19% between March 9 and 15. Some investors argue that this is the time to buy into Japan – advice that echoes Baron Rothschild, who made a fortune following the Battle of Waterloo: “Buy when there’s blood in the streets, even if the blood is your own.”
But can so much destruction really trigger growth? Firstly, this depends on whether people are willing and able to put money back into the system. Reconstruction after Hurricane Andrew boosted Florida’s economy, according to one study, but Hurricane Katrina obviously left poor neighborhoods in New Orleans languishing.
China launched a massive rebuilding effort following the devastating Wenchuan quake in 2008 that the State Information Center projected to boost national GDP by 0.3 percent. In Qinghai province, however, a recent article by the SCMP paints a much different picture of the more remote city of Yushu still in rubble one year after an earthquake.
Studies have returned conflicting results on the economic effects of natural disasters: One found that floods can boost the overall economy by renewing the soil (floods were the reason Mesopotamia’s Crescent was so fertile, after all). But earthquakes are typically more expensive than floods because they rip apart infrastructure.
Japan will rebuild its roads, power lines and pipelines, but the effort will be complicated by a shortage of finances. The country’s debt is already double its economy.
Japan is considering raising its sales tax to help finance the emergency response. Although the increase wouldn’t be implemented until the next fiscal year begins in April 2011, it would be another straw on the Japanese consumer’s back. Consumer confidence fell to its lowest level in March since the financial crisis.
Reconstruction may boost GDP in the longer term, but I suspect the disaster is just re-routing investment from one part of an economy to another. The May issue of China Economic Review argues that Japanese reconstruction will boost demand for raw materials, machinery and infrastructure suppliers like railways builders.
Good news for glaziers, perhaps, but this capital might have been destined for more productive uses. The World Bank estimates damage to Japan’s infrastructure to be US$123-235 billion, not to mention knock-on effects in other countries.
Some studies have found that natural disasters can be a good opportunity for countries to adopt the newest technologies, increasing productivity – jumpstarting capitalism’s process of creative destruction, in other words. However, Japan is already a world leader in technology – how much could tech improvements increase productivity?
Some investors will find a silver lining in the crisis, but most of economy should prepare for storms.
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