Sunday, March 13, 2011

Japanese Earthquake Aftershocks

The death and damage from the earthquake in Japan is horrific.  My guess is that we will see the extent of the damage to be even greater than early estimates suggest.  The magnitude of the earthquake has already been upgraded from 8.9 to 9.0.  To put this in perspective, this earthquake was 8,000 times stronger than the quake that recently devastated New Zealand.  It is a testament to the engineering skills and construction practices of the Japanese that the damage was not much, much greater.

Early estimates are that there have been about $10 billion in insured losses.  This seems very low to me but only about 10% of Japanese homes are covered by earthquake insurance.  The 1995 Kobe earthquake resulted in $100 billion in losses but only $3 billion were insured. By contrast, the 1994 Northridge, California earthquake (6.8 on the Richter scale) cost $23 billion in insurance losses in today's dollars.  I don't know what the final financial tab is going to be but it is going to be huge.

Where does the money come to rebuild?  As bad as our economic and financial picture is in the U.S., Japan  is in even worse shape.  Japan has a debt a load that is in excess of 200% of GDP.  This is far in excess of any other country.  It's population is aging faster than any other country in the world.  By 2015, one in four Japanese will be 65 or older.  This is double the U.S. percentage.  The Japanese stock market stands at about the same level it was in 1983.  It is down over 75% from its 1990 high.  Japan's benchmark interest rate has been 0% since late last year.  Yes, zero!  They have been fighting deflationary sources for much of the last 20 years with low interest rates and huge deficit spending to little effect.

They now have to pay all the debt they have accumulated and also pay for rebuilding in the aftermath of the earthquake.  The good news is that the Japanese have not relied on foreigners to finance their profligate spending.  Only 12% of their debt is held abroad. Compare that to other countries in this chart from

The Japanese also hold about $900 billion of our government debt in their reserves.  This could be a source of funds for rebuilding. However, if they sell our bonds to raise cash that will put pressure on the dollar and   our bonds.  There is only so much capital in the world and a very large need is out there.   Aftershocks will continue for some time in Japan until the fault lines stabilize.  However, the financial aftershocks could reverberate closer to home.  Yet another reason that we need to get our federal and state government deficits under control.  There is only so much money to go around.

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