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

Tyler Durden's picture

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.

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John McCloy's picture

Tyler wouldn't Treasury yields be going up not only on the inability for the Japanese to partcicipate in auctions but the likelihood that they are about to liquidate a large portion of their 860 billion we owe them? 

   Or can the PDs counterbalance that with POMO>

camaro68ss's picture

would make Sense to me. but knowing the FEDs im sure they have something up there sleaves

cossack55's picture

"something up their sleeves"

AHA. An ace of.....no...thats a trillion dollar bill....wait

AHA. An ace of.....no...thats a ten trillion dollar bill...wait

AHA. An ace of.....no...thats a one hundred trillion

You get the point.

John McCloy's picture

I wish my ace in the hole was being able to print money whenever I need it. Too bad they do not sell money printers for your jacket pocket at Wal-Mart then we all would be PHD's. Crazy world were living in ladies and gents. 

NotApplicable's picture

I find it interesting (or should I say sickening) that when I read the cost to be $1T over the next several years, I still have no idea what the cost will be.

Relying on measurement in dollars provides us with no meaningful info whatsoever, especially over time.

 

Boston's picture

In a Risk-Off period, the newly created, POMO fueled, "wealth" that ran into risk assets would rush out--the amount of these outflow could easily push Treasury prices up, overcoming the effects of any possible Japanese sales.

Also, if Japan sold US Treasuries and then converted dollars back to Yen, what would the skyrocketing Yen do to one of the only bright spots in their economy--their exports?

Misean's picture

A whole lot of Japanese GDP is gonna get consumed locally for a while.

msohn's picture

So should we think about adding USD 1 Trillion to the Japanese government's JPY 969 Trillion of debt and guaranteed debt? That would push the total debt to GDP ratio up by 20% points on top of the 10% increase we might have otherwise expected. Japan ended 2010 with a debt-to-GDP ratio of 201% and will now effectively be at 230% at the end of this year (factoring in the incremental expenditures from this disaster).

tmosley's picture

Considering one out of 75 Japanese just became homeless, and at least one in 3000 is dead, I would say a quick bounce back is pretty well impossible.

I wonder how many individual Japanese people are going to liquidate treasuries to rebuild?

Our hyperinflation might have just found its trigger.

Mad Max's picture

In all seriousness, 3-5% of GDP is quite tolerable.  Smaller countries have recovered from disasters with ten times, or more, that share of their GDP.

Two big uncertainties:

-will it really be contained to "only" 3-5% of GDP?

-will the attempt to rebuild such a prosperous country cause sufficient distortions in energy and commodity markets that the costs are far higher, or have severe effects elsewhere?

Misean's picture

"Smaller countries have recovered from disasters with ten times, or more, that share of their GDP."

Yeah?!?! No shit Sherlock. Probably because 5% of $100 is $5 and 5% of $5T is $250B. Makes a difference.

Vampyroteuthis infernalis's picture

prosperous country

Japan has not been a prosperous country in years. If they had a stable economy, yes, they would come back no problem. In their current predicament, no.

Johnny Lawrence's picture

Or, liquidate stocks, no?

TruthInSunshine's picture

Uh Oh.

Breaking

Crisis Deepens at Reactor in Japan
As Exposed Fuel Rods Overheat


Emergency Efforts to Cool Reactor Failing, Raising Dangers

By HIROKO TABUCHI, KEITH BRADSHER and MATT WALD 11 minutes ago

Emergency operations to pump seawater into one crippled reactor failed at least temporarily, increasing the risk of a uncontrolled release of radioactive material.

cossack55's picture

More importantly, what is Kudlow's take and what is Cramer's play?

TruthInSunshine's picture

Kudlow said thank God there isn't much more 'stuff' of economic value standing near the reactors, that could get destroyed, and Cramer says go long NFLX.

Cdad's picture

Cramer says buy casual dining stocks.  Consumers not killed by radiation, or are otherwise too concerned to breath fresh air, are super resilient, baby!

Cdad's picture

Prepare for helicopters with cement sling buckets....but whatever you do, don't worry about this situation.  The Japanese government is in control, and they are getting some sweet advice from the US government, to boot I'm sure!

Mass death and homelessness, tsunami flood destruction, drowning, radiation leaks and meltdowns...we have been told by the criminal syndicate known as Wall Street, with the assistance of the Ministry of Truth [CNBC] , that these things are bullish baby!

Never mind the Vix breaking on through that 200, man!  Never you mind.  Just keep your eye on the effervescently adorable E. Burnett and things will be just fine.

cossack55's picture

Would that "sweet advice" be offered by one Jeffy Imelt?  GE designs reactors, JI appointed to WH Econ Council, GE building windmills, where is my damn aluminium foil.

E. Burnett is adorable? How about repulsive unless delivered with three paper bags.

Cdad's picture

E. Burnett is adorable

That is so "last hour" man...get up to speed.  We are now onto our oddly obtuse president talking about green energy.  That will save Tokyo from the soon to be toxic radiation plumes.

Oh..and don't rush with that whole cement thing...no...no.  Keep on trying to save burning cores with fire trucks.  Nice...good work!

Where does a fellow apply to be a script writer for the new American Marxist regime?  I need the work.

cossack55's picture

Do they still have access to Yamashita's Gold?

Spalding_Smailes's picture

If all three reactors meltdown ( one being MOX ). Not sure how many people will be doing much of anything in the northern half or most of Japan. They should wait 2-3 weeks before making any long term forecast ...

Rolling blackouts ect ....

bob_dabolina's picture

I'm not a nuclear scientist but can anyone here with a semi-related backround in nuclear science explain what a meltdown means exactly?

I understand the core is melting and I understand that is no bueno, but what would a worse case scenario be going forward? The core ends up in the water table? Does it burn through to the core of the Earth? I'm fuckin' lost.

TruthInSunshine's picture

Look below:

 

Exposed Fuel Rods Overheat, Raising Risk of Breach

 

They're talking "breach," right now...massive front page headline of New York Times

ivana's picture

What about shrinking China and exports? What about oil which will/should go much higher under existing powerz scenario? What about population, domestic production, wasted pension funds, years of low yields (can it get lower than that)... possible hyperinflation ... jesus - if this is not a black swan ...???

cossack55's picture

Actually, using similar material that is causing headaches in Japan in a different application would certainly be one way to shrink China. We would be exporting that material at about 1400 miles per hour.

benb's picture

My two cents...Japan is gone.

koot's picture

It is going to be much more than $1 trillion in losses, much more than that because this is going to be world wide effect. 

I want everyone to think not of the economic loss, but the full worst case disaster which could be 3 melt downs with a plume of highly contaminating hot nuclear material ejected into the atmosphere and circulate across the Pacific hitting the West Coast of North America first and continuing all the way around.

Then think of the poor souls who have, are and will be giving up their lives to go into this pending meltdown to fix valves, pumps and vents in order to prevent a meltdown.  These are likely to be Japanese who will be sacrificing themselves to protect the world.  I take a deep bow in silence to give them every respect and feeling I have.

ghostfaceinvestah's picture

$1T = 80% of the size of Benocide's MBS monetization from 03/09 through 04/10.

TWORIVER's picture
Japan nuclear disaster risk seen receding fast, according to Reuters report Click here to read full story
Spalding_Smailes's picture

"At this juncture . . . the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained," Bernanke said in prepared testimony.

Congress' Joint Economic Committee Wednesday, March 28, 2007 

Bicycle Repairman's picture

"and three reactors will probably be written off"

 

Probably?  LOL.

It is a bargin my friend's picture

From the BBC blog

1844: Mikan in Tokyo writes: "There is a growing sense that the Japanese government is not telling us the true story. On one end, there is the Japanese media that plays down the nuclear drama and focuses on human drama, and at the other, the foreign media is up-playing the nuclear disaster. In my company I heard at least half the essential staff is being sent to Hong Kong, Singapore or even Sydney. I am preparing to leave Tokyo and/or Japan. So are many of my friends. There is a sense of deserting Tokyo as soon as possible.

 

TruthInSunshine's picture

Breaking news that, well, sucks -

Exposed Fuel Rods Overheat, Raising Risk of Breach

 

They're talking "breach," right now...massive front page headline of New York Times.


Cdad's picture

Brother Truth,

You are throwing a seriously cold, wet, cement blanket on the criminal Wall Street syndicate's attempt to save the close of the market by lifting Japanese futures [which is beginning to fail].

You are not a very nice person, are you brother Truth?  Don't you know that a lot hockey helmet wearing brokers on the floor of the NYSE still have casual dining stocks to unload on Average Joe?  Are you not concerned about their commissions?

As for Japan, send in the freakin' cement already!

 

TruthInSunshine's picture

You raise an excellent point.

I am not a scientist or engineer, but I can only surmise that at least one of the reasons they're not pouring cement and other material over the reactors is because they can't get close enough.

Maybe they don't want to entomb them for other reasons. I don't get the lack of a more robust response.

 

Bicycle Repairman's picture

Reactor #3 contains MOX.  Enough f'ng around with sea water.  It is time for the Chernobyl playbook and all that it implies. May G-d have mercy on their souls and their families.

Cdad's picture

It is time for the Chernobyl playbook

Amen!  Ready the choppers and cemment buckets!  We have seen this before!  Yes, some people will die...some people being much better than 14 million people.

Cdad's picture

From the NYT article:

“They’re in total disarray, they don’t know what to do.”

I guess they did not follow that whole Chernobyl thingy.

But hey...don't worry....Bob Pisani feels good about today's market action.  The whole nuclear cloud thing is probably already priced in.  After all, it's not like Japan's economy matters to the globe.

"Market shrugs off nuclear terror...bids up $11 burritos as sushi loses bid"

 

 

jSixPack's picture

I don't know what it is like at your house but I am about to throttle my twelve year old grandson (bless his pointed little head) if he comes up with just one more contrived question that allows him to use the word "Fukushima"!

cossack55's picture

I would say "give him a dose of lithium and sit him down in front of an old Barney rerun" but before you know it he'd be in CONgress.

sabra1's picture

send in all the bankers to cool off the reactors. by the way, how safe do you think those tsa scanners are? 

cossack55's picture

Good suggestion on cooling solution. Screw the scanners. I don't want Peter the Perv grabbing my junk in a aggresive manner.

Spalding_Smailes's picture

Monday afternoon, Japanese authorities said that they have asked for help from the international nuclear agency, IAEA.

U.S. has also been asked to contribute their expertise in this area.

The Japanese nuclear engineer Masashi Goto said a few hours ago that the next 24 hours will be crucial if one manages to avoid a complete meltdown of this reactor. If that happens, along with a blast, plutonium can be spread over an area twice the size of a conventional nuclear explosion. This is because, according to Goto that these reactors using mixed oxide fuel.

The Japanese expert believes that an explosion at one of these plants will be worse for the population, than if the same happened in a facility that uses ordinary nuclear fuel.

www.vg.no 

Bicycle Repairman's picture

The Japanese government needs to consult with the Russian government and their nuclear engineers, since we are quickly heading into a Chernobyl-like situation.

youngman's picture

I don´t think anyone knows what the extent of the damage is at this point and time....I am suprised the markets have held up as well as they have...gold and silver..flat pretty much..dollar/ yen....huh??? uranium down....???  The Japanese are tough when it comes to tragedies...they will work together and rebuild...but they will quit consuming...no more game boys for  awhile...and I don´t think its over yet...more aftershocks etc...

the toxic plume is our problem as the winds blow out to sea...watch California implode as all the enviro´s claim they have been exposed....sales of radiation equipment in California is booming right now....along with iodine tablets I bet...lead coats for the mooovie stars....and feefee the poodle too...

SilverRhino's picture

Oh, it will go a lot higher as the Tokyo Exodus accelerates