Initial Estimate of Japanese Quake Toll

This morning the Japanese government announced its initial estimate of the toll of the earthquake that struck almost two weeks ago.  At this point the maximum damage estimate is put at $309 billion (¥25 trillion).

Analysis: Per person in Japan the above estimate is $2,422, using their population of 127,560,000 in 2009 (source: www.google.com/publicdata).

Japan had total gross domestic product (GDP) of $5.07 trillion in 2009 (source: same as above), which works out to $39,746 GDP per capita.  So the earthquake’s costs are equivalent to 6.1% of every single Japanese families income on a GDP per capita basis.  Ouch!

Another way of looking at this information is that the United States’ hurricane Katrina cost $81 billion, so at this early stage, the Japanese quake is estimated to be 3.8x larger in total damages.  Double ouch!

In total the earthquake damages are assumed to cost 6.1% of one year’s worth of Japanese gross domestic product.  Initially costs are estimated to take a full 0.5% off of Japanese GDP this year with the remainder to drain the economy over the next many years.

In terms of worldwide GDP the quake’s costs are equivalent to $309 billion ÷ $61.96 trillion = 0.5%, or half a percentage point.  This is not a big number for the global economy to absorb.  Additionally, the Japanese will need to finance its economic recovery and will be purchasing goods from around the world to rebuild itself.  While this will be a boost to GDP, most of this will not be a boost to real economic growth as I define it.

Some of the rebuilding will put in place more efficient technologies or stronger building structures more capable of surviving future earthquakes.  But most of the economic “growth” will simply be to replace what was lost.

This estimate by the Japanese government is important because it is the left brain, quantitative analysis that can be bridged with a right brain, qualitative, intuitive assessment of the Japanese disaster.

Importance grade: 9; that the Japanese government has assessed damages and assigned a number to those damages is the important thing, irregardless of the total of $309 billion.  Why?  Because investors despise potentially massive open-ended costs.  By bringing into the light an estimate of quake costs much of the anxiety that has crippled financial markets regarding Japan will dissipate.  Now investors will shift their attention to something else, most likely the first quarter U.S. corporate earnings season which ensues in exactly 8 days.

Jason