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Japan: Earthquake destruction will dampen GDP growth in H1, but economy likely to rebound in H2

March 11, 2011

On 11 March, Japan suffered a 9.0 magnitude earthquake followed by a devastating tsunami, which hit the northeast of the country, leaving more than 28,000 people dead or missing and causing severe damages at the Fukushima Daiichi nuclear power plant. According to analysts, the massive destruction is likely to account for between 3-5.2% of GDP, surpassing the USD 100 billion (2.0% of GDP) damages incurred by the 1995 earthquake in Kobe. Japanese government estimates the earthquake and tsunami's damage at as much as 25 trillion yen (USD 309 billion). However, while the loss in wealth and human life is massive, the impact of the disasters on economic growth should be limited. In the short run, economic growth will nose-dive, perhaps even dipping into the red, reflecting production losses due to destroyed capacity and possible energy shortages that may hamper industrial output going forward. Moreover, as threats from the Fukushima nuclear plant continue to dominate the news, household confidence is also likely to be hit, dragging down already sluggish private consumption. But these losses should be compensated in the second half of the year and buttress growth in 2012, as the reconstruction work gets underway. Following the reconstruction, the major concern will be public debt, which already surpasses 200% of GDP. However, with interest rates close to zero, the sustainability of the debt burden is not an issue at present. Moreover, sovereign risk is reduced further as about 95% of public debt is held by Japanese investors (of which some 90% are institutional investors that are partly obliged to hold government debt).


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