The ramifications of the Japan quake are impossible to know at this point, and the human toll will obviously be the most important, and devastating, aspect of the whole disaster.
In the cold math of the markets, the earthquake will spark economic activity. Lumber futures in the U.S. are higher this morning in anticipation of the rebuilding effort. There’s the thought that with the nation’s nuclear plants offline, crude oil demand will rise. But that’s cold comfort for all the bad things that are going to happen, both economically and from just a mere human standpoint.
Capital Economics’ Julian Jessop has started sketching out the ramifications:
The consequences of the major earthquake and tsunami that hit Miyagi Prefecture and other areas in north-eastern Japan today are not yet clear and the impact on local people is of course foremost in everyone’s minds. But the financial markets also need to consider the economic costs and the implications of the disaster for the public finances. These could be considerable.
While noting environmental disasters often have a smaller economic impact than initially feared, since the resulting reconstruction boosts demand, and that Japan is uniquely prepared for earthquakes. But considering the state of Japan’s economy, the timing is very bad.
The timing of the disaster could not have been much worse. The economy had already
contracted in the final quarter of last year. This shock may be too small and too late to have much impact on GDP in Q1, but does marginally increase the chance that output will decline in the current quarter as well. Moreover, a large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control. Overall, it will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster. At the very least, the scope for fiscal stimulus to mitigate the economic damage is much less than it was in 1995.
Japan is still the world’s third-largest economy, so what happens there is very likely to have some kind of impact overseas.