Japan has certainly been unfortunate during the past couple of decades. It has had almost twenty years of confidence-destroying slow economic growth, a series of humiliating confrontations with a rising and more aggressive China, and finally the biggest earthquake ever recorded in Japan. And this earthquake not only directly caused great damage, but it also set off a tsunami with huge destructive power. As if this were not enough, the combined earthquake-tsunami badly damaged two nuclear energy plants located on the fault lines and by the sea, damage that led to the release of as yet undetermined amounts of radiation. Still, I do not expect this disaster, despite its severity, to have major effects on the Japanese economy, but it will have a big impact on the nuclear power industry, and may help different countries better prepare for very rare but destructive natural events.
The fundamental loss to the Japanese people from this earthquake-tsunami-nuclear disaster is the destruction and damage to people and property. Perhaps in the end about 20,000 people would have been killed, and many others would be severely injured, including the unfortunates who were exposed to high levels of radiation. Twenty thousands deaths are a terrible loss, but they are only a small subtraction from the economy since they constitute about 0.016% of the Japanese population of some 127 million people. Studies of what people in a country like Japan would be willing to pay to avoid highly rare destructive events like that of a magnitude 9.0 Richter scale earthquake combined with a major tsunami suggest that these 20,000 deaths would be valued by about $3 million per death (many of those who died are older and have shorter remaining lives). The total cost of 20,000 deaths would then be $60 billion, a large sum to be sure, but again very small relative to Japan’s GDP of about $5 trillion.
The loss of property is even more difficult to calculate at this point. Since the earthquake hit a depressed region of Japan dependent on declining industries like farming and fishing, it could not have caused a major loss in buildings, equipment, and consumer durables relative to Japan’s total stock of assets. The output produced by the worst affected parts of this region are no more than about 4% of Japan’s GDP, so that percent would be a gross upper bound to the economy’s loss of buildings and equipment.
Even if the leaks from the nuclear reactors are contained without major public exposure to radiation, the combined loss of people and property are sizable in an absolute sense, and of course are disastrous to the people who lost their lives and property, or the lives of their loved ones. Still, it is not a major economic loss to Japan as a whole, and per se these losses should not result in more than a small decline in the per capita standard of living of the Japanese people.
Further economic consequences always follow from major disasters. Production by some businesses has been temporarily reduced since supply chains were disrupted. Since the earthquake hit a depressed and declining region, out migration of young men and women will accelerate, as will the decline of fishing and farming in that region. Construction will increase to replace some of the destroyed homes, businesses, and infrastructure. Presumably also, substantial amounts will be spent on repairing the damaged nuclear plants. These increased activities might give the appearance of an economic boom in the region, but it is a fake “boom” since they will mainly replace or repair destroyed and damaged buildings and equipment. I do not expect it to take very long before the region replaces most of its damaged property. A year after the powerful Kobe earthquake in 1995 that destroyed or damaged about 100,000 homes, GDP of the Kobe region of Japan surpassed its level prior to the earthquake.
The growing worldwide boom for nuclear energy will surely end. Nuclear power does not use fossil fuels and does not cause environmental harm if the radioactive waste is disposed of properly. However, these major advantages now have to be weighed against the different events that can damage nuclear reactors, and release large amounts of radiation into the atmosphere. At the minimum there will be a justified reluctance to locate new reactors on earthquake fault lines and close by seas that may have major tsunami action. Some reactors already in these vulnerable locations may be closed or relocated. Yet I hope that this does not also lead to a sustained moratorium on construction of new nuclear energy plants, but rather mainly induces even closer attention to safeguards against the release of high radiation levels, whether due to natural disasters or terrorist attacks.
It is difficult for people, no matter what their intelligence, to factor into their behavior the consequences of exposure to events that are both very rare, such as a major earthquake, and cause major damage when they do occur. It often takes decades that encompass most or all of a typical lifetime before another such event occurs. In addition, it is not always clear about how much protective action should be taken against such events. The expected damage from such events, which is the product of a small number (the probability of the event), and a large number (the damage inflicted when the event occurs), may itself be only moderate in size. Such moderate expected damages would not justify very expensive protective measures.
Governments have important roles to play in providing the latest information in readily accessible form on the location and likelihood of major, if rare, potential disasters. They also have the responsibility to prevent the building of plants, such as nuclear reactors, in places that would greatly harm people and property in the event of catastrophic events. At the same time, governments need to allow housing and other markets the flexibility so that individual choices can price into different locations their vulnerability to various rare but catastrophic events. An important World Bank study on disasters (see the important book ”Natural Hazards, UnNatural Disasters”, staff of the International Bank for Reconstruction and Development/ World Bank, 2010) shows, for example, that in flexible housing markets property values often are lower in areas more vulnerable to earthquakes and other disasters.