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A Silver Lining for the Land of the Rising Sun

Posted By Dylan Royce On April 15, 2011 @ 1:33 am In Global Education | Comments Disabled

As radiation and body counts continue to rise, one could be forgiven for predicting a gloomy future for Japan’s economy.
With thousands of people dead and billions of dollars worth of property lost, it is difficult to see how Japan’s catastrophic earthquake could do anything but harm it.
Yet, history suggests it could actually help. In 1995, a magnitude 6.8 earthquake struck near the city of Kobe, southwest of Tokyo.
While substantially less cataclysmic than this year’s disaster, it and the tsunami it produced still killed about 6,500 people and caused $100 billion in damage.
Last month’s earthquake, in contrast, may have killed up to 27,000 people and caused up to $309 billion in damage. While it is clearly much larger than its 1995 counterpart, the two earthquakes have much in common, including their timings.
Both occurred during times of economic contraction or stagnation, and the Kobe earthquake’s impact on the Japanese economy 16 years ago is probably a good indicator of what the Sendai earthquake’s effects will be.
The 1980s were good years for Japan’s economy. Its annual growth for the decade averaged 4.5 percent.
Yet, much of that growth was driven by unsustainable financial practices. In 1991, the bubble burst, and economic growth shrank to a trickle.
In 1992, economic growth totalled 3.32 percent. By 1993, it had fallen to 0.08 percent, and a year later was down to 0.02 percent. Had things continued along the same path, Japan’s economy would have shrunk in 1995. Instead, tragedy struck.
The Kobe earthquake caused damages equivalent to 2.1 percent of Japan’s annual GDP, yet triggered an economic rally that more than made up for it (though, of course, there is no way to make up for the lives lost and broken).
The economy grew 0.86 percent that year, 1.88 percent the next, and 2.64 percent in 1997. The disaster seemed to have reversed the fall. Unfortunately for the country, it fell victim to the 1997 Asian financial crisis the next year.
A series of economic calamities throughout East Asia hit other countries, such as Indonesia and South Korea, harder than they did Japan, but its neighbors’ devalued currencies reduced its companies’ ability to compete, causing the economy to again contract, growing only 1.56 percent in 1998 and actually shrinking 2.05 percent the following year.
But while the economy could not survive a second crisis, the 1995 earthquake seems to have reversed the first.
Economic growth during the three years preceding the disaster averaged 0.5 percent, while growth for the five years after it averaged 1.78 percent. Moreover, the economy expanded 7.1 percent during those years, more than making up for the 2.1 percent in damages.
As in 1995, Japan’s economy, and the world’s, is in crisis. Though it is, this time, exiting rather than entering a recovery, this one, like ours, has been slow.
It seems likely, however, that this year’s earthquake will do what its predecessor did, and trigger an economic expansion, if not boom.
Assuming that a second economic crisis does not strike, Japan’s economy could likely grow substantially in the coming years, fueled by consumer demand for replacement goods, employment provided by reconstruction efforts, and the Bank of Japan’s injection of $183 billion into the banking system.
The disaster, in fact, may be exactly what Japan needs to push its economy firmly out of recession.
Should it do so, the United States would do well to heed the lesson that economies can be saved using government spending and economic intervention. We do not need to wait on a disaster to put our own into practice.

As radiation and body counts continue to rise, one could be forgiven for predicting a gloomy future for Japan’s economy. With thousands of people dead and billions of dollars worth of property lost, it is difficult to see how Japan’s catastrophic earthquake could do anything but harm it. Yet, history suggests it could actually help. In 1995, a magnitude 6.8 earthquake struck near the city of Kobe, southwest of Tokyo. While substantially less cataclysmic than this year’s disaster, it and the tsunami it produced still killed about 6,500 people and caused $100 billion in damage.Last month’s earthquake, in contrast, may have killed up to 27,000 people and caused up to $309 billion in damage. While it is clearly much larger than its 1995 counterpart, the two earthquakes have much in common, including their timings. Both occurred during times of economic contraction or stagnation, and the Kobe earthquake’s impact on the Japanese economy 16 years ago is probably a good indicator of what the Sendai earthquake’s effects will be.The 1980s were good years for Japan’s economy. Its annual growth for the decade averaged 4.5 percent. Yet, much of that growth was driven by unsustainable financial practices. In 1991, the bubble burst, and economic growth shrank to a trickle. In 1992, economic growth totalled 3.32 percent. By 1993, it had fallen to 0.08 percent, and a year later was down to 0.02 percent. Had things continued along the same path, Japan’s economy would have shrunk in 1995. Instead, tragedy struck. The Kobe earthquake caused damages equivalent to 2.1 percent of Japan’s annual GDP, yet triggered an economic rally that more than made up for it (though, of course, there is no way to make up for the lives lost and broken).The economy grew 0.86 percent that year, 1.88 percent the next, and 2.64 percent in 1997. The disaster seemed to have reversed the fall. Unfortunately for the country, it fell victim to the 1997 Asian financial crisis the next year. A series of economic calamities throughout East Asia hit other countries, such as Indonesia and South Korea, harder than they did Japan, but its neighbors’ devalued currencies reduced its companies’ ability to compete, causing the economy to again contract, growing only 1.56 percent in 1998 and actually shrinking 2.05 percent the following year. But while the economy could not survive a second crisis, the 1995 earthquake seems to have reversed the first. Economic growth during the three years preceding the disaster averaged 0.5 percent, while growth for the five years after it averaged 1.78 percent. Moreover, the economy expanded 7.1 percent during those years, more than making up for the 2.1 percent in damages.As in 1995, Japan’s economy, and the world’s, is in crisis. Though it is, this time, exiting rather than entering a recovery, this one, like ours, has been slow. It seems likely, however, that this year’s earthquake will do what its predecessor did, and trigger an economic expansion, if not boom.Assuming that a second economic crisis does not strike, Japan’s economy could likely grow substantially in the coming years, fueled by consumer demand for replacement goods, employment provided by reconstruction efforts, and the Bank of Japan’s injection of $183 billion into the banking system.The disaster, in fact, may be exactly what Japan needs to push its economy firmly out of recession. Should it do so, the United States would do well to heed the lesson that economies can be saved using government spending and economic intervention. We do not need to wait on a disaster to put our own into practice.

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URL to article: http://www.denebolaonline.net/2011/04/15/a-silver-lining-for-the-land-of-the-rising-sun/

URLs in this post:

[1] Seismic trend reaches Asia: http://www.denebolaonline.net/2010/03/24/seismic-trend-reaches-asia/

[2] What to do when your country tears apart: http://www.denebolaonline.net/2010/03/24/what-to-do-when-your-country-tears-apart/

[3] Earthquake, tsunami devastate Japan; nuclear disaster feared: http://www.denebolaonline.net/2011/03/23/earthquake-tsunami-devastate-japan-nuclear-disaster-feared/

[4] Icelandic volcano paralyzes air traffic: http://www.denebolaonline.net/2010/05/21/icelandic-volcano-paralyzes-air-traffic/

[5] APOCALYPSE?: http://www.denebolaonline.net/2010/05/21/apocolypse/

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