Quake, tsunami could awaken Japan's struggling economy

McClatchy NewspapersMarch 11, 2011 

WASHINGTON — The devastating damage unleashed on Japan Friday by a massive earthquake and then a tsunami will greatly stress the world's third-largest economy, but it also will require rebuilding that will deliver a perverse economic stimulus.

It'll be days, if not weeks, before the full extent of damage is known from a quake that registered 8.9 on the Richter scale. TV reports showed serious damage to highways and bridges, and even fires at refineries in the capital of Tokyo, far from the quake zone.

The U.S. Geological Survey said it was the most powerful quake ever in Japan, and the world's fifth strongest on record.

The port city of Sendai, 186 miles northeast of Tokyo, appears to have been hit hardest, as seen in apocalyptic video images of buildings swallowed whole by rushing water and ships bobbing upside-down like children's toys in a bathtub.

Fires were reported at some Japanese auto plants. Both Nissan and Toyota are thought at minimum to have suppliers in the Tohoku region, which was hardest hit.

Early reports suggested that the tsunami also affected Tokyo Bay, which is home to both the giant container port of Yokohama and numerous terminals for ships carrying liquefied natural gas. Japan remains a major exporter of goods.

The damage to the Tohoku region and Sendai, a city of 2.3 million, is extensive, but roads and bridges across much of Japan are going to need repair. That's a perverse silver lining in the unfolding human tragedy.

"The Japanese are basically going to have to do a big Keynesian public works program. They needed some kind of stimulus for their economy, and now they've got it," said Marcus Noland, an Asia expert for The Peterson Institute for International Economics.

Japan was the world's second-largest economy until China passed it last year. Its massive budget deficit — equal to 10 percent of its economic output — and its troubled banking system combined to create a decade-long national funk. Japan's ratio of public debt to the size of its economy is now more than 200 percent and will surely rise as it incurs more debt to rebuild after Friday's disaster. The U.S. debt-to-economy ratio, while higher than the historical norm, is still less than half Japan's.

Japan spent billions of dollars during the past decade on bridges and roads, but much of it didn't contribute to the nation's ability to produce more goods. Prior to the quake, the International Monetary Fund expected Japan's economy to grow by a sluggish 1.5 percent this year. Now they can build anew, perhaps with more productive results.

"I don't want to minimize the human toll of this, but I think the economic impact may not be as bad as some people are talking about. On the margins, they have wasted so much money, it's going to force the Japanese political system to deal with this issue," Noland said.

"Japan faces a problem of increasing concentration of economic activity in the Tokyo area . . . this may be an opportunity to shift some of that development north," Noland said.

Many U.S. companies — from engineering and architectural firms to the timber and cement sectors — could see a boost in sales to Japan as rebuilding gets under way.

Private insurance will cover much of Friday's damage to personal and commercial property, said Dan Ryan, a U.S.-based global analyst and Japan expert for IHS Global Insight.

"Japan has a lot of cash and a high savings rate, so the private sector shouldn't have any problem, especially through insurance," Ryan said.

In another reaction to Friday's devastation, the price of a barrel of West Texas Intermediate crude oil fell below $100 in intraday trading before settling down $2.04 at $100.66 a barrel. Japan is a major oil importer, and in the short run its demand will be muted, traders concluded.

Another silver lining in Friday's disaster were the early warning systems now in place throughout much of the Pacific region following the horrific 2004 tsunami that struck Indonesia and other Indian Ocean countries. Their warnings Friday gave citizens on both sides of the Pacific ample time to prepare for the tsunami as it crossed the ocean.

"Looking at it from the Pacific perspective, it validates the decisions to set up the Pacific early warning system ... It's been quite effective, and you have places like Hawaii where you've had hours of warning," said Neil Ashdown, a security expert in London for IHS Global Insight.

Friday's events were a horrible sequel for Japan. A 1995 earthquake that struck Kobe took more than 5,000 lives and did more than $130 billion in damage. At the time, it was considered the most expensive natural disaster ever.

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