Japan’s Earthquake: Not an Economic Catastrophe

Moisés Naím / El País

It is as impossible not to be moved by the images of suffering and destruction in Japan as it is not to be surprised by the stoicism of the victims. Usually, the scenes following a disaster are of panic, disorder, and even looting. In Japan, we see long lines of people calmly awaiting medical attention or buying food. And faces that reflect an unimaginable pain that is seldom expressed stridently. The Japanese deserve our admiration and solidarity.

The international financial markets are also behaving at odds with what one would expect after such a disaster. They are betting that the Japanese economy recuperates sooner than the images of devastation may suggest. They also bet that the financial impact in other countries will be minor and the long-term economic effects will not be significant.

Less than one week after disaster hit Japan—with the nuclear plants still burning and the stock market in decline—international investment funds specializing in Japanese companies received record amounts of money. That week, investors deposited $956 million; the week before, the amount was a meager $180 million.

The same happened with the currency. Days after the tragedy, the yen reached its highest level since World War II. A currency this strong has very harmful effects on the country’s exports and causes multiple international imbalances. The central banks of the seven most industrialized countries intervened and were able to stabilize the yen at more reasonable levels. This, too, was unusual: central bank coordination of this kind had not happened in over a decade.

The yen had strengthened because the markets anticipated a massive repatriation of Japanese capital deposited in other countries and currencies. As this money will be needed to finance the nation’s reconstruction, demand for the yen will obviously increase. Assuming that this would raise the value of the currency, speculators rushed to buy yen. But in this case some lost their bet: the central banks’ intervention contained the yen’s appreciation.

Those who will probably not lose, however, are the investors betting on Japan’s rapid recovery. While this accident was devastating, the highest estimate of its costs is $300 million, with a majority of analysts estimating the damage at $200 million. If proven correct, this estimate represents only 4 percent of Japanese economic activity and 1 percent of the country’s wealth. Financial Times columnist Martin Wolf points out that in Japan, the world financial crisis had an impact equivalent to 10 percent of its economy, and Japan had the hardest-hit economy among the world’s richest nations. Even though the images we saw in Japan after the financial crisis were not as painful and dramatic as those we see now, the reality is that the 2009 crash affected a vastly larger number of Japanese.

Another calculation is that Japan’s recovery will be as quick as those of other major catastrophes. HSBC’s Garry Evans studied the financial impacts of the earthquakes in Kobe, Japan in 1995, Taiwan in 1999, Chile in 2010, and the September 11 terrorist attacks. He found that after an initial fall, the respective stock markets recovered to their pre-catastrophe level between 23 and 78 days afterward. One hundred days later, they were above this level. Moreover, the economies affected by these disasters grew, thanks to the stimulus sparked by the reconstruction efforts and investments. In 2010, Chile suffered from a devastating earthquake and grew 5 percent. After the Kobe earthquake, Japan’s growth rate also accelerated.

Obviously, Japan’s tragedy has other negative economic effects, many of which may not even be apparent yet. For now it is clear, for example, that global supply chains have been disrupted by the damage to Japan’s manufacturing base. This, in turn, may fuel global inflationary pressures. The insurance sector will also be hard hit, as will the nuclear energy industry. That this will be the case is another conclusion international markets seem to have reached: as the price of most other commodities has soared, that of uranium dropped 30 percent.

The Japanese earthquake, tsunami, and nuclear incident of 2011 will be remembered as a terrible human tragedy—but not one with lasting economic consequences.