The Effect of the Triple Japan Disaster

Our Sympathy

Firstly let us express our shock and horror of the triple disasters that have struck Japan. The extent of the devastation is hard to comprehend, even with all of the graphic pictures and videos. Each picture is worse than the previous in visualizing just how extensive the disaster has been.

Our feelings go out to all of the people who have faced the consequences of these tragedies.

A Perspective
The initial stock market reaction was a dramatic drop in the Japanese markets, and also a drop in stock markets worldwide. This is most understandable from many points of view. As time passes and we see the destruction to Japan’s manufacturing base – the auto sector, the chip and tech sector – the effect is expanding in the short term. Losses are immense.

After the shock of the disaster fades, we need to focus on the massive rebuilding effort that will be forthcoming. Yes, we agree that the very large debt of Japan will have to grow even greater. However remember that Japan has the 3rd largest economy in the world. Until displaced recently by China, it was the 2nd biggest.

Japan’s Debt
Taking on even more debt will add further stress to the Japanese economy. Yet we should remember that a large part of the current national debt was incurred by repeated efforts to stimulate the economy.

The spending on the rebuilding effort will be expenditures on real goods and services, and not phony spending. This is real. Billions and billions of damage and destruction have to be rebuilt.

Start thinking about the large demand for resources, for labor, for services, for technical expertise that will result when the rebuilding starts in earnest.

Where Does the Money Come From ?
Much of the rebuilding will be funded by the insurance industry. A high proportion of the insurance will have been sourced within Japan. Over the coming months, reserves at those insurance companies will be drawn down to fund the reconstruction efforts. Some of the insurance proceeds will come from overseas, through international insurance companies and through reinsurance.

Massive Stimulus
The net effect will be that the Japanese economy will receive a massive stimulus.

Think about the rebuilding of Europe after WWII (Marshal Plan). Think about the spending in East Germany. Think about the effect of the massive construction recently in China. Money is spent on real goods and services in these efforts, and the effect is a massive worldwide demand, resulting in measurable increases in the economy of countries around the world.

Cause & Effect
While the disasters were horrendous in their severity and their effect, the long term silver lining (if there is one) could be a massive stimulus to the world’s economy.

Japan is not a small economy. The spending on rebuilding will be enormous.