Quake, tsunami set to see Japan run up $200 b losses

Economists took stock of the damage to buildings, production and consumer activity. The disaster is expected to hit Japanese output sharply over the coming months, but economists warned it could result in a deeper slowdown if power shortages prove significant and prolonged, delaying or even scotching the “v-shaped” recovery that followed the 1995 Kobe earthquake.

Most believe direct economic hit will total between ¥10-16 trillion ($125-$200 billion), resulting in a contraction in second quarter gross domestic product (GDP) but a sharp rebound in the latter half of 2011 as reconstruction investment boosts growth.

Although the damage to infrastructure has been severe, some of the biggest risks to the economy may come from indirect market consequences of the disaster, such as a rise in Japanese yen, which surged to an all-time high against the dollar after the Kobe earthquake in 1995 as Japanese firms pulled funds home. The dollar has fallen 3 per cent against the yen since the disaster and is now close to the low hit after Kobe.

The direction of the yen could have a big impact on Japanese carmakers like Toyota Motor Co, Nissan Motor and Honda Motor, which build between 22 and 38 per cent of their cars at home.

The area of Japan affected by tsunami produces around 4.1 per cent of the country’s GDP, suggesting first-round economic effects could be limited. But with the fate of the Fukushima nuclear reactors still unclear, Japan may not have felt the full force of the disaster yet.  However, reflecting the high degree of uncertainty about global economic impact of the disaster, the US Federal Reserve made no mention of Japan in a statement issued after its policy meeting on Tuesday. The European Central Bank also appears to be in wait-and-see mode even as money markets scale back their expectations for monetary tightening this year.

Japan’s public debt is twice the size of its $5.3 trillion economy, the highest ratio of any large developed country in the world. But unlike other high debt countries, only 5 per cent of its debt is held by foreign investors, so the risks of a funding crisis are limited.

France for G7 meeting

Still, in a sign European leaders may be nervous about their debt crisis spreading to Japan following the disaster, France said it had called a meeting of G7 finance ministers and central bankers to respond to the crisis, mentioning possible purchases of Japanese debt.

For now the government is using ¥200 billion in emergency reserves to pay for anti-crisis efforts. The rapidly evolving disaster has prevented government officials from working on an emergency budget which could be in the range of ¥5-10 trillion.