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Japan Earthquake: Lessons From Kobe Offer Hope for Swift Recovery in Sendai

While some press reports warned that the Sendai earthquake could derail the Japanese economy, the impact of the disaster is likely to be much less severe than initial impressions may suggest.

Takuji Okubo, chief Japan economist at Societe Generale Securities, tells Bloomberg that it could slice an estimated 1 percent off the country's GDP. By comparison, the quake that hit Kobe, Japan, and other parts of central Honshu in January 1995, killing roughly 6,500 people and causing an estimated $150 billion in economic losses, reduced growth in the short-term by 2 percent.

But while industrial production fell sharply following the earlier calamity, it bounced back quickly. Japan's GDP for the year rose 2.6 percent, buoyed by a massive reconstruction effort around Kobe. The government went on to invest more than $58 billion over the next three years to rebuild infrastructure, housing and public facilities. Private spending also lifted growth, as consumers and businesses used their own savings to fund reconstruction. Only 15 months after the quake, manufacturing in the affected region had rebounded to 98 percent of its previous level.

Some experts think a similar redevelopment effort could insulate Japan's economy from serious harm. Said Helen Hodge, a natural hazards analyst at the risk analysis and mapping firm Maplecroft:

Typically, after such large events in well-developed economies, an associated boom in construction is seen in the months following an event. This boom effect could provide a welcome buffer from any short-term impact on Japanese GDP.
Japan also learned its lesson from Kobe. Since the earlier quake, the government and insurance companies have encouraged companies to prepare "business continuity plans" to avoid long-term supply-chain and other disruptions.

What affects how quickly countries recover?
Academic research shows that several factors affect how quickly economies bounce back after a natural disaster. These include how swiftly emergency aid is provided to the affected population; the quality of assistance; and the economic significance of the affected area and industries. Writes economist Christian Jaramillo in a 2009 paper that looked at how natural disasters affect economic growth:

Assistance to the affected population is important because it will determine the speed with which productive factors are put back to use after a natural disaster. Quick and organized help to the affected population has other benefits, which include preventing the spread of disease among the injured and homeless.
The Kobe quake had relatively little impact on the Japanese economy because other regions were able to quickly absorb lost production, according to a 2000 study by Purdue University's George Horwich. Meanwhile, the FT notes that the hardest-hit regions on Friday are less economically vital to Japan than the areas that were devastated after the Kobe event.

To be sure, the Sendai quake could do serious harm to Japanese business. As my colleague Erik Sherman notes, the country's high-tech industry is likely to suffer as a result of "upset operations, damaged facilities, and disrupted global supply chains." Japanese automakers and energy facilities may also suffer disruptions.

Another impact could be significant emigration out of the Tohoku region in northern Honshu near the epicenter of the quake. After Kobe, some 100,000 people are estimated to have left the area, many in search of work. The area around Sendai, which has a population of more than 1 million and is the region's commercial hub, is also fairly agricultural, which research shows tends to recover more slowly after major earthquakes.

For now, the extent of the damage remains difficult to forecast. With luck, however, the tragic loss of life in Japan won't be compounded by an economic downturn.

Thumbnail from Kenpei via Wikimedia Commons; image from Wikimedia Commons CC 3.0
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