Picking Up the Pieces After Japan's Quake: Is a Stimulus Coming Next?
A powerful mega-magnitude 8.9 earthquake rocked Japan to its core, rattling businesses with operations in the affected areas. But economists and analysts note that one of the aftershocks could be an economic stimulus for the debt-ridden country.
Most U.S. businesses, in general, seem to have escaped the worst of the damage. That's because corporate America tends to locate its Japan operations around the heavily populated center of Tokyo. A much less populated region of Japan -- more than 200 miles northeast of Tokyo off the coast near Sendai -- took the brunt of the damage.
IBM (IBM) says its Japanese operations reported no serious injuries or system outages and it's still assessing how the earthquake will effect its business. Investment bank Credit Suisse says it encountered only superficial damage to its Tokyo offices, adding that its employees managed to keep working and actually completed a number of business processes during and after the earthquake. And international law firm Bingham McCutchen's Tokyo site also remains intact, with sound technical infrastructure.
Business Impacts: Cars, Phones and Flights
Some businesses, however, were either directly or indirectly affected by the temblor. Toyota Motor (TM), for example, shut down its Hokkaido subsidiary and its Tohoku production plants, as well as its Central Motor Miyagi Plant and its Kanto Auto Works Iwate Plant. In a statement, the storied automaker noted that its employees did not suffer any injuries and that it continues to gather information, adding: "We are also currently assessing the situation at our suppliers, dealers and the impact on North American import vehicles."
Phone companies took some losses too. Japan relies heavily on mobile phones, and the quake put cell-phone service out of commission, while traditional land-line phone service was also severely impaired. Nippon Telegraph and Telephone, a major Japan telecom carrier, set up emergency phone lines and created a special Internet bulletin board where folks could leave messages for family and friends, The Associated Press reported.
Tokyo's bustling Narita Airport temporarily shut down after the earthquake. A limited number of flights have resumed departures from the airport, but incoming flights have remained halted. As a result, 10,000 passengers have been left cooling their heels at Narita, while another 11,000 wait at the coastal Sendai Airport, which suffered damage when tsunami-induced floodwaters submerged the runways.
In addition to Narita and Sendai, flight service to Tokyo International Airport, commonly called Haneda airport, was also temporarily suspended, Yonhap News Agency reported.
The Bright Side of Disaster
In spite of the catastrophic destruction caused by the earthquake, it actually caused less damage and death than the big Kobe quake of 1995.
"The region where this quake struck is not that key to Japan's economy as a whole," says James Lincoln, a professor of the Haas School of Business at the University of California at Berkeley. "Tokyo is relatively unscathed. And if it had happened there, it would have affected supply chains [and] car companies, and that would have had an impact on U.S. consumers. Sendai is only about 8% of Japan's GDP. The disruption to the supply chain is not all that great."
And natural disasters can actually end up having some positive impacts, as well as negative ones, when it comes to a country's economy, Lincoln points out.
"There's going to be a lot of rebuilding -- a lot of jobs created -- and it could serve as a major economic stimulus," he says, adding that the earthquake will also prompt Japanese residents living in the quake-ravaged areas to shop for replacement items for their homes.
Of course, that home damage hurts consumers. Much of the money the Japanese spend to refit their homes won't be coming from insurance carriers, but from consumers' pockets, according to a report from Jeffries analyst James Shuck.
Insurance Investors Unworried
But that's good news for international insurance carriers. Investors in behemoths like American International Group (AIG) apparently felt confident, as stocks in those companies rose in trading Friday.
Even though AIG has said that it is still working to assess the losses, adding that it would take some time to evaluate its exposure, Shuck offered a bullish first take. "Overall insured losses appear significant but manageable at this stage," he writes in his report. "We are working on an industry loss in the region of $10 billion. ... On this basis, we would expect around a 5% impact on most reinsurer and Lloyd's company balance sheets."
In his report, he notes that the limited fatalities -- probably in the hundreds, not thousands -- mean that most of the insured losses will likely involve property. (Fatalities accounted for 37% of the losses in the Kobe earthquake, while 42% comes from household losses.)
In this case, household losses also will likely be limited because most homes aren't insured, Shuck says. "Around 10% of households actually elect for supplementary earthquake cover and coverage is only for a fraction of the property value," he writes. "This explains the wide divergence between the 1995 Kobe earthquake that incurred $100 billion of economic losses (original value), but only $3 billion of insured losses."
Government to Take on More Debt
So, if Japanese residents lack insurance or savings, where will the money come from to rebuild their homes? The debt-ridden government, Lincoln says.
Japan already has the world's highest ratio of debt compared to gross domestic product, and this will widen its lead on other nations. Japan has a 200% debt-to-GDP ratio, roughly twice that of the U.S.
"One interesting thing for people to watch for is how the Japanese government will respond. The government didn't have its act together for the Kobe quake," Lincoln said. "A lot of people criticized the Kobe government for leaving people stranded and homeless. Japan doesn't have much of a safety net. People in crisis are expected to stay with relatives or take care of things on their own."
Hopefully those folks have enough money stuffed under mattresses -- or available to borrow from their relatives -- to rebuild their lives and pump up the economy.
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