Baseline Japan Disaster Cost Estimates: 3-5% Of GDP; Could Be As High As $1 Trillion

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All those hoping (here's looking at you Mo) to see a prompt bounce back in Japan to baseline economic levels may be in for some disappointment. Reuters reports that according to various sellside analysts, the impact to Japanese GDP (which is virtually tied with China for the world's second largest economy), could be anywhere between 3 and 5%. "Quake-hit Japan  faces a recovery and reconstruction bill of at least $180 billion, or 3 percent of its annual economic output and more than 50 percent higher than the total cost of 1995's earthquake in Kobe. The Kobe earthquake is estimated to have cost $115-118 billion, or 2 percent of GDP in 1995 terms. This time -- in a still unfolding disaster -- initial estimates from Credit Suisse and Barclays put the cost at $180 billion. Mitsubishi UFJ Securities and Sarasin expect the cost could run as high as 5 percent of GDP. Mitsubishi's estimates take into account a wider economic cost including a loss of tax revenues, subsidies to various industries of the affected area, loss of productivity following rolling blackouts on top of straight reconstruction costs." And it could be far, far worse: "some extreme projections of the longer-term cost look at figures closer to $1 trillion over several years." And as we first quantified over the weekend, the reinsurance caps for real estate losses are maxed out at about $60 billion. Which means either the government will leave those with insurance policies to split pro rate proceeds that refunds amounts owed at a big haircut, or in tried US fashion, will have to step in with emergency transfer funding measures, capitalized through the issuance of tens if not hundreds of billions of new debt. As for who will buy that debt, we look forward to Bill Gross' next letter for clues thereto. In the meantime, look for global GDP to be cut by at least 1-2% by the sellside pundits "shortly" especially as the way for QE3 is paved by the likes of Jan Hatzius who is lucky to have a force majeure on his second "Golden Age" call.

More details from Reuters:

The world's third-largest economy, already saddled with public debt double the size of its $5 trillion output, must rebuild its infrastructure, including roads and rail to power and ports -- in a scale not seen since World War Two.

Friday's quake and tsunami has so far killed at least 10,000 people and struck a northeastern region which accounts for an estimated 6-8 percent of gross domestic product, compared with around 12.4 percent from the areas affected by the Kobe quake.

However, the loss of fixed assets and human capital from a quake which has also triggered hydrogen explosions at a nuclear power plant, looks to be far greater, at a time when oil is near a 2-1/2 year peak and other commodity prices remain elevated.

The economic damage is likely only to shave a sliver off global growth, and tens of billions of dollars in the reconstruction bill are likely to eventually help boost Japan's economy and the Asian construction sector.

But analysts say past experience shows the cost may yet overshoot initial estimates.

"From the experiences, there is a tendency to underestimate," said Brendan Brown, head of economic research at Mitsubishi UFJ Securities.

"There are many uncertainties -- we don't know how long power outages will last and that's an ongoing cost, in addition to reconstruction. There is a loss of output from dislocation. If that goes on for two months, that may dwarf the cost of reconstruction."

Rough estimates show that replacing a nuclear power plant alone may cost $5 billion. Desperate to avert a nuclear meltdown, Japan was forced to sacrifice three of its reactors by pumping seawater to cool reactor cores.

Insured losses from Japan's earthquake could be as high as $35 billion, even without tsunami and nuclear related losses.

Then there are those who actually read between the lines and see the big picture:

Some estimates of the reconstruction shoot far higher than these consensus forecasts as economists take into account the potential need to replace the country's devastated capital stock over a longer timeframe.

Vanessa Rossi, senior research fellow at London-based think tank Chatham House, estimates that 10 percent of Japan's capital stock was lost in the earthquake, which equates to around 20 percent of the country's GDP, or $1 trillion.

Some estimates of the reconstruction shoot far higher than these consensus forecasts as economists take into account the potential need to replace the country's devastated capital stock over a longer timeframe.

Vanessa Rossi, senior research fellow at London-based think tank Chatham House, estimates that 10 percent of Japan's capital stock was lost in the earthquake, which equates to around 20 percent of the country's GDP, or $1 trillion.

"The bigger cost is rebuilding of capital stock. This type of problem really causes damage to capital stock. There's enormous damage to infrastructure -- installations, power plants, housing, factories, ports, coastline," Rossi said.

"You couldn't possibly rebuild so extensively in the period of 1-2 years. I expect it would be 4-5 years of work."

If Vanessa is right, the only question is how many more trillions in dollars more will the Fed burn in its latest "moderate reflation" attempt before the DXY finally takes the inevitable step down below 50.