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Impact of Japan's Earthquake

How It Affects the Global Economy

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Japan Crisis Begins To Stabilise After Quake Disaster

Japan Crisis Begins To Stabilise After Quake Disaster

Photo: Paula Bronstein/Getty Images
woman sitting on ground after fukushima earthquake

A local resident rests as she evacuates an area after a 9.0 magnitude strong earthquake struck on March 11 off the coast of north-eastern Japan, on March 14, 2011 in Sendai, Japan.

(Photo by Kiyoshi Ota/Getty Images)
auto factory workers

The crisis temporarily slowed parts supply to U.S. auto makers.

Photo: Getty Images

Japan's economy was dealt a devastating blow by the 9-magnitude earthquake and tsunami that pummeled the country on March 11, 2011. An estimated 28,000 were dead or missing, and at least 500,000 were displaced. Many of the people in the area were elderly, and cold weather and disrupted transportation routes made rescue efforts difficult.

To make things worse, radiation contamination was added to their concerns. The earthquake and resultant tsunami were bad enough caused a radioactive leak at the Fukushima nuclear power plant. Japan classified this nuclear disaster as a 7, the same level as the Chernobyl nuclear disaster. However, while worse than Three Mile Island, it wasn't quite as bad as Chernobyl. There, a raging fire spewed radioactive particles into the jet stream for days, contaminated the surrounding countryside and even made its way to Europe.

In Japan, although workers were initially unable to stop radioactive leaks at the damaged Fukushima nuclear power plant, only 1/10 the level of radiation was emitted. However, radiation continued to leak into the Pacific Ocean, raising levels to 4,000 times the legal limit. It took months to stop the leak. Radiation showed up in local milk and vegetables, and briefly appeared in Tokyo's drinking water.

Impact on Japan's Economy

Japan's nuclear industry supplied a third of the country's electricity. In total, 11 of Japan's 50 nuclear reactors were closed immediately following the earthquake. The capacity to produce electricity was reduced by as much as 40%, and has remained at less than 80% of pre-quake levels. (Source: Carl Weinberg, High Frequency Economics)

The World Bank estimated that Japan's disaster would cost between $100-$235 billion, and take five years to rebuild. This is worse than the $125 billion cost estimate for Hurricane Katrina (although one estimate put Katrina's damage at $250 billion). The quake hit Japan's north-east section, responsible for 6-8% of the world's third largest economy. The impact is 10x worse than the 1995 Great Hanshin earthquake near Kobe, which cost over 6,000 lives and about 10 trillion yen ($100 billion). There, rebuilding took seven years.

Many wondered if Japan would need to sell U.S. Treasuries (it's the second largest holder) to pay for rebuilding. It did this several months after the Hanshin earthquake, according to Nancy Vanden Houten, analyst at Stone & McCarthy Research. This would have lowered the value of the dollar, increasing the cost of imports to the U.S. However, Japan didn't need to because it was able to finance the rebuilding program from its people's savings. (See Will Japan Sell Treasuries?)

Although the Bank of Japan provided market liquidity to ensure the stability of financial markets, the long-term impact hass been negative to the country's struggling economy. Rebuilding will lift the economy a bit, but it will be outweighed by the probable increase to the national debt -- already twice as big as Japan's annual economic output. Moody's warned it may cut Japan's credit rating, increasing the country's cost to service its debt.

The quake and tsunami damaged or closed down key ports, and some airports shut briefly. This disrupted the global supply chain of semiconductor equipment and materials. Japan manufactures 20% of the world's semiconductor products, including NAND flash, an indispensable electronic part of Apple's iPad. Japan also supplies the wings, landing gears and other major parts of Boeing's 787 Dreamliner.

Automakers Toyota, Nissan, Honda, Mitsubishi and Suzuki temporarily suspended production. Nissan may move one production line to the U.S. A total of 22 plants, including Sony, were shut in the area.

Japan's economy had just started to recover from 20 years of deflationary period and recession. It seemed to be on the mend by 2010, when GDP increased by 3%. The earthquake only added to Japan's economic challenges of government debt, rising commodity prices and a shrinking labor pool.(Source:AP, "Breach in Reactor," March 25, 2011; ABC News, "Considerable Economic Impact from Japan's Quake," March 12, 2011; iStock Analyst, "Experts Divided on Quake's Economic Impact," March 13, 2011)

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