How Natural Disasters Have Affected Japan’s Economy

Introduction

For more than half a century Japan has proven to be a front runner in the global economic market. From pre-WWII days to more recent times, this geographically small country has made strides that have been unseen in other regions of the world. Even though Japan has seemingly achieved “effortless” economic success, it has not been without some major impediments along the way. The economy went from thriving, above average growth rates to much slower progression and almost stagnant growth in present time. Many obstacles in the form of a rapidly increasing and aging population, questionable spending, and a debt-to-GDP ratio of over 200% have influenced the country’s growth rate over the past few decades. But the one interference to the country’s economic stability that is recurring and unavoidable is natural disasters. Japan is in the Pacific Ring of Fire, which is highly prone to all sorts of natural disasters including typhoons, earthquakes, and tsunamis. These uncontrollable forces of nature, both past and present, plague Japan’s economy and its people. How have these events, and attempts to recover from them, played a role in the Japanese economy?

A look into a few specific disasters will shed some light and be able to help answer this question. A Few of the biggest disasters to hit Japan include the Great Kanto Earthquake, Typhoon Vera, the Kobe Earthquake, and the Tohoku Earthquake and Tsunami. The timing and magnitude of these events played a big role in how severely the economy was affected and how long it took to fully or partially recover. While there are many more notable catastrophes that have affected the country, focusing on these four will paint a general picture of the kind of rollercoaster the Japanese economy has gone through. Looking into this topic brings up a few questions: Does Japan use the same plan to recover from each disaster? Or do they react uniquely to each event? Searching for a commonality may show us how Japan is able to recover from these disasters relatively quickly.

The Great Kanto Earthquake

The Great Kanto Earthquake of 1923 was devastating to Japan as it caused between $800 million and $1.2 in trillion damages (Stanford University News Service). Before the 1920’s, Japan’s economy was doing quite well due to the combat taking place in WWI. There was an increase in demand for Japanese goods because the output from countries involved in the war was dropping. Once the war ended, the demand began to decline, and their economic bubble popped. Trying to stabilize the economy proved to be challenging and things only got worse once the Kanto Earthquake hit on September 1, 1923. The earthquake occurred around noon and registered at a 7.9 in magnitude. It destroyed countless structure and roadways, and the damage caused many fires which ended up reeking even more damage. “Assets worth around 3,290 million yen, approximately equal to 22 percent of Japan’s GNP in 1923, were destroyed” (Okazaki). The government set up special arrangements in the affected areas which allowed many payments that were due to the government be postponed until mid-1927. The government also began to make “special loans” to banks and industries that were struggling, in order to keep them afloat. Because so many structures were destroyed, a great deal of assets that would normally help produce revenue for the country were gone. So, the country’s output was greatly affected which in turn meant less money was coming in. After the earthquake hit it was a priority of the government to focus on rebuilding infrastructure so that production of goods was able to continue. They hoped that this would help avoid market instability.

Surprisingly, Japan was able to economically recover from the Kanto quake quickly. The natural disaster paired with the popping of the WWI bubble could have proven disastrous, but government interference aided in diverting a complete economic crisis. Unfortunately, there was no time to celebrate avoiding a financial emergency because Japan was then hit by the Showa Financial Crisis in 1927. Even so, the country deserves positive recognition for getting through such a terrible period without long term consequences.

Typhoon Vera

The Kanto quake was undoubtedly devastating to Japan and its people, but earthquakes are not the only natural disasters the plague the country. Different types of storms frequent the island and Typhoon Vera was particularly destructive. Damages were estimated to be up to $261 million in 1959, which roughly translates to $167 billion today. Much like the Kanto Earthquake, the timing of this disaster was very unfortunate because it took place not very long after WWII which Japan was involved in and was still recovering from. Once again, the government took an active role to make sure the economy and product market remained stable. Japan’s recovery plan after Typhoon Vera was like that of the Kanto quake. The government stepped in and offered loan deferments and when they saw that their production was slowing down, they put much of their effort and funding into rebuild the elements that were key in keeping production going. This aided in short-term reconstruction and long-term financial benefits. They were also forced to establish a supplementary national budget to cover the cost of the losses throughout the country, especially in the hardest affected areas. A good example of this is the Japanese pearl industry which was expected to see a decline of 30% over the following few years.

Once the economy began to up-turn, the government made disaster reduction and preparedness their focal point. In the decades following Typhoon Vera, Japan dedicated between 5-8% of their total GDP to disaster risk reduction. In addition to this, September 1st was dubbed Disaster Prevention Day in Japan to prepare their communities for the next natural disaster. According to a report done by the government of Japan in 2005, disaster prevention day is such a priority that the Japanese government dedicated 2.7 trillion yen, or 5% of the total general-account budget to this cause. Not only did this disaster affect Japan’s economy at the time it occurred, it spawned a whole new long-term expenditure that is seen as an investment to help save lives and capital in the future.

The Kobe Earthquake

Fast forwarding almost 40 years and Japan’s economy is doing well but they are unaware that they are about to experience another devastating disaster. The Kobe Earthquake registered as a 6.9 quake and struck the second largest economy in the country. The damage sustain during the earthquake was said to be somewhere between $95-174 billion which translated to 2.5% of the country’s GDP. What made it even more disastrous was that it happened only a few years before the Asian financial crisis which shook the entire regions financial market.

The quake affected all of Kobe’s industries; from ports, to shoe factories, to sake manufacturing. William DuPont, from the University of Chicago Press, claimed that even after the Asian financial crisis had passed and most countries in the region had stabilized, nothing was the same in Kobe. None of the industries in that territory have functioned at 100% like they did before the earthquake hit. Production in the area was able to recover up to 98% of their production output, but never 100%. This was a big hit to the economy, given that 39% of the country’s gross industrial products came from Kobe and surrounding areas (DuPont). The government once again intervened to help the region recover and implemented new guidelines in anticipation of the next disaster. Land readjustment was one of the biggest undertakings by the government to rebuild the destroyed areas. They also implemented new regulations and incorporated state of the art technologies when rebuilding infrastructures. It was thought that if they took precautions now and invested more money into buildings that were more resilient, while at the same time increasing their capital, then the next disaster would not be as costly to recover from. This strategy seemed to be successful because the economy bounced back quickly, and they were seeing close to pre-earthquake production and growth.

Japan made it through the recovery of the Kobe Earthquake and was just getting past hardships of the Asian financial crisis when another disaster hit in 2011. On March 11th of that year the country was rocked by a 9.1 quake that lasted for six minutes and caused a subsequent tsunami with waves well over 100 feet high. Unfortunately, with the combination of the earthquake and the enormous waves, another crisis was created in the form of a nuclear powerplant crisis. Three disasters in one sent the cost of damages skyrocketing and is now estimated to be around $235 billion, which makes it the most expensive natural disaster in history.

Tohoku-Oki Earthquake and Tsunami

The Japanese economy took a big hit in the recovery process. The stock market fell 6.9% in the aftermath of these events (Weinstein). Three supplementary budgets were introduced to start rebuilding efforts, which had a combined total of $221 billion. In the article Economic Impacts of the 2011 Tohoku-Oki Earthquake and Tsunami, it is said that 90% of the supplementary budget was put towards infrastructure damage and rebuilding important capital so production of goods may continue. The article goes on to say that this budget will be funded mostly by government bonds, as well as a 2.1% increase in taxes for civilians and a 10% increase for corporations. With reconstruction being focused on key industries, Japan was once again able to avoid financial ruin. As of today, almost 80% of industries are performing at pre-crisis levels; with the construction industry being one of the most profitable. Sadly, not all companies were so fortunate. After the damage was done, Japan saw over 200 companies go bankrupt (Waldenberger). Even as the economy begins to stabilize, the growth rates are not what they once were and probably won’t be for quite some time. The country is still dealing with the consequences of the nuclear power plant meltdown, with clean up and prevention of further breakdown being very costly. Nuclear power plant safety is being prioritized in hopes that a similar catastrophe can be avoided in the future. As of now there is not enough knowledge to gauge if there are any major, long-term deficits to the economy.

Conclusion

These four events are only a fraction of the natural disasters Japan has experienced in the last 50 years and it is interesting to see how the economy manages to bounce back fairly quickly. After each of these incidents, there seems to be a commonality of swift government intervention in the form of loan deferments and supplemental budgets. The government also makes the rebuilding of essential production capital a priority in order to keep output of goods running as smoothly as possible. In addition, the government makes a clear point to invest in disaster readiness and prevention to save lives and capital. The decision to focus on these three elements after each disaster discussed has worked and kept Japan’s economy stable enough to hold their place as the world’s third largest economy. The economy has gone from having a negative growth rate as a result of natural disasters to performing at pre-crisis rates all in the matter of a few years. This is not something to be overlooked. As unfortunate as it is, natural disasters in Japan are guaranteed to continue but if the government continues to prioritize these main points, their place as an economic strongman is safe.