The 11 March 2011 Tohoku Pacific earthquake was the strongest ever recorded in Japan and triggered the country’s worst disaster of the post-war era. We express our deep regret at the loss of life and offer our condolences to those affected by this tragedy.
The four prefectures most affected by the earthquake (Iwate, Miyagi, Fukushima and Ibaraki) account for 6 to 7% of Japan’s population and economic output. The destruction caused by the earthquake and the subsequent tsunami is so large that it is not possible at this point to estimate its economic impact. Such disasters reduce potential growth through damage to tangible fixed assets and injury and loss of life. The 1995 Kobe earthquake, for example, resulted in damage estimated at around 2% of GDP. The area hit by the Kobe earthquake, as a share of GDP, was roughly comparable to the area devastated by the Tohoku Pacific earthquake. Nevertheless, the impact of the 11 March disaster may be much worse, given the greater severity of the earthquake and the subsequent tsunami. Moreover, a series of aftershocks continues to shake Japan.
In particular, the earthquake and tsunami seriously damaged nuclear power plants in the Tohoku region, which depends heavily on such plants for electricity. Measures to contain overheating at some reactors may render them unusable. An estimated one-fifth of Japan’s domestic nuclear capacity has been closed at least temporarily since the earthquake, resulting in electricity shortages. The authorities plan rolling blackouts in the eastern half of Honshu for at least several weeks beginning 14 March.
Power shortages and the need to repair the damage caused by the earthquake and tsunami has forced many factories to suspend production, including in the car and electric equipment sectors. The adverse effects in areas hit by the disaster may spread to other areas of the country and overseas due to shortages of parts. Consequently, industrial production in March is likely to fall, followed by further weakness in April.
The Tohoku Pacific earthquake occurred as the Japanese economy appeared to be emerging from a lull in the latter part of 2010. While disasters reduce economic activity in the short run, subsequent reconstruction efforts tend to boost output growth. The government has started discussions on reconstruction measures. At present, fiscal resources appear limited to the remaining 0.2 trillion yen (0.04% of GDP) reserve fund in the FY 2010 budget and the 1.1 trillion yen (0.2%) reserve in the FY 2011 budget. However, supplementary budgets to finance reconstruction efforts will expand available fiscal resources. In the wake of the Kobe earthquake, for example, the central government spent about 5 trillion yen (1.0% of 1995 GDP).
At its 14 March meeting, the Bank of Japan’s Monetary Policy Board decided to double the size of the asset purchase programme, originally introduced in October 2010, from 5 trillion yen to 10 trillion yen (2% of GDP), while providing ample liquidity. The central bank is also monitoring the impact of the earthquake on financial markets and financial institutions. Equity prices have fallen sharply since 11 March, with the benchmark Nikkei average down by 16%. Sales by foreigners may have helped reverse initial upward pressure on the yen, perhaps reflecting the repatriation of overseas assets by Japanese insurers.
The OECD will be working closely with the Japanese authorities in the coming months and is ready to assist them in any way we can at this difficult time, including by helping them assess the impact of the tragedy on the economy and determine the necessary policy responses.
Last Update: Paris, 15 March 2011