Deadly Japan Earthquake Risks Fiscal Crisis

March 11, 2011
The area hit hardest hosts industrial zones with chemical and electronics plants, an area that accounts for about 1.7% of Japan's total output.

The massive Japanese earthquake has raised the chances of a fiscal crisis in the world's third largest economy and could affect countries around the globe, analysts in Europe and the U.S. said on March. 11.

"It may be several days before the costs of the disaster are clearer," British consultancy Capital Economics warned in a study, a view echoed by counterparts elsewhere.

"The greater the social and economic damage, the larger the threat to the government's ability and willingness to ward off a fiscal crisis," added the report written by economists Julian Jessop and David Rea.

ING economists underscored the fragile state of Tokyo's finances, while Carl Weinberg at High Frequency Economics in the United States said: "This is a sad day for Japan, and economic aftershocks could affect the whole world's economy."

Counterparts at the Japanese bank Nomura were less alarmed, noting that the huge Japanese quake that hit Kobe in 1995 had not seriously harmed the economy in the medium term.

More than 1,000 people probably died in the massive 8.9-magnitude earthquake that hit Japan on Friday, unleashing huge tsunamis along its Pacific coast, Kyodo News agency said.

"The impact on local people is of course foremost in everyone's minds," Capital Economics noted. "But the financial markets also need to consider the economic costs and the implications of the disaster for the public finances. These could be considerable."

Japan is burdened by the industrialized world's biggest debt, which runs close to 200% of GDP.

Economists stressed however that the earthquake was not of the same impact as the devastating quake which ravaged Kobe. "This disaster is probably not the 'big one' that seismologists have long been fearing," Capital Economics said. "Mercifully, the scale appears to be much less than that of the Great Hanshin-Awaji earthquake that hit Kobe on Jan. 17, 1995.

"The Kobe earthquake left 6,434 dead and about 300,000 homeless, and caused damage estimated at 10 trillion yen (US$100 billion at the exchange rates of the time.)" That was equivalent to around 2.5% of Japan's 1995 GDP, Nomura senior economist Takuma Ikeda told a telephone news conference.

This time, the area hit hardest hosts industrial zones with chemical and electronics plants, an area that accounts for about 1.7% of Japan's total output," Nomura chief European economist Peter Westaway said.

"The impact on overall activity is not going to be that great," he estimated but it "might then have a knock-on effect on confidence in the JGB (Japanese government bond) market."

Ikeda stressed that in 1995, the economy bounced back within two quarters, but the latest earthquake could not have been timed much worse for Japan, according to Capital Economics.

The Japanese economy shrank by 1.3%in the three months to December, compared to a year earlier, official data had showed on Thursday. That was worse than the initial estimate of 1.1%.

"A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control," added the consultancy. "Overall, it will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster.

"At the very least, the scope for fiscal stimulus to mitigate the economic damage is much less than it was in 1995."

Weinberg at High Frequency Economics concluded that "anyone who tells you that they have a handle on the economic consequences of this event is wrong.

"There is no way to assess even the direct damage to Japan's economy or to the global economy," he said.

Copyright Agence France-Presse, 2011

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