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Tags: Japans Final Disaster Damage Bill May be Staggering

Japan's Final Disaster Damage Bill May Be Above $300 Billion

Monday, 04 April 2011 10:44 AM

Japan's government expects last month's earthquake and tsunami to cost up to $300 billion in material damage, but the ultimate cost will be far higher.

Tokyo Electric Power Co. (TEPCO), operator of the crippled Fukushima nuclear power plant, could leave the government with additional costs in excess of $200 billion covering nationalization of the company and compensation claims.

Then there is the hit to GDP.

The March 11 quake and tsunami knocked out more than 20 percent of Tokyo Electric's power generation capacity and the shortages will reduce industrial output and could fuel recession in the world's third-biggest economy.

Under a scenario in which Japan's economy shrinks in both the first and second quarters, close to $160 billion in economic activity would be wiped out, a Reuters calculation shows.

"A crucial difference for previous earthquakes is the large-scale power outages and supply chain disruptions caused by the crippled power plant," said Naohiko Baba, chief economist at Goldman Sachs in Tokyo.

"We assume that power outages will depress production throughout 2011."

The 9.0 magnitude earthquake and tsunami that followed dealt a crushing blow to Japan and will require the country's biggest reconstruction effort since World War II. More than 12,000 people are confirmed dead and over 15,000 are missing.

Most importantly for the economy, the natural disaster damaged power plants, leaving shortages. Specifically, it left engineers scrambling to control radiation leaks and avert a meltdown at the Fukushima Daiichi plant run by Tokyo Electric.


The government estimated that the disaster damage would cost at least $190 billion and at most over $300 billion.

By either count that would make it the world's costliest disaster, surpassing both Hurricane Katrina that leveled much of New Orleans in 2005 and Japan's Kobe earthquake in 1995.

Even before Tokyo issued the assessment on March 30, most private-sector analysts had forecast the damage alone would cost $200 billion to $250 billion in repairs.

Close to 170,000 homes in the north of the country that took the brunt of the disaster are without power and 200,000 have no running water.

About 46,000 buildings were destroyed or burnt down, and 155,000 others are damaged. More than 2,000 roads, 56 bridges and 26 railways were either damaged or destroyed.

Economic growth will benefit longer term once reconstruction gets into full swing. But analysts expect the economy to take a hit until TEPCO and Tohoku Electric Power Co. Inc., which supplies northern Japan, can bring back enough power supply to meet demand.

Nomura estimates the Japanese corporations on its Nomura 400 companies index, which includes all Japan's blue chips such as Toyota Motor Corp. and Sony Corp., to chalk up $17 billion in lost profits owing to diminished power supply in the financial year that began on Friday.

"We see a growing risk of prolonged problems with electricity supply at companies covered by Tokyo Electric Power and Tohoku Electric Power," Nomura said.

The areas served by these companies produce half of Japan's economic activity, Nomura estimates.

Analysts forecast the economy will either shrink by 1.4 percent in the first quarter from the fourth quarter, or expand around 0.6 percent. GDP fell 0.3 percent in the fourth quarter.

However, a Reuters GDP poll for the second quarter of the year produced a median forecast that the economy would contract by 1.4 percent.

In the worst case scenario, where the economy shrinks by 1.4 percent for two consecutive quarters, $158.6 billion would be wiped off the economy, according to Reuters calculations.

Assuming growth in the first quarter of 0.6 percent followed by a quarterly contraction of 1.4 percent, a much smaller $46 billion would be lost in GDP.

Japan's economy pretty much sailed through the Kobe earthquake in January 1995, expanding for the first three quarters of the year before experiencing a slight pull back in the fourth quarter.


Other costs are adding up.

Prime Minister Naoto Kan said the crippled nuclear plant needed to be decommissioned, a process experts said could take more than a decade and cost up to $19 billion.

The world's top insurers have so far said the disaster will cost them $5 billion, although risk modeling agencies suggest the overall cost to insurers would be as much as $30 billion.

The government, though, could face a much higher bill from the disaster than first thought as confidence in TEPCO plunges.

The firm's shares have dropped as much as 81 percent since March 11 and analysts said the firm faces huge compensation claims, factors driving speculation the government will be left with little choice but to nationalize the company.

Bank of America-Merrill Lynch estimated compensation claims could add up to $133 billion. How quickly TEPCO can resolve the crisis will be critical to the ultimate bill, analysts said.

"If TEPCO can stabilize their nuclear plant quickly, compensation claims will likely be less than 1 trillion yen ($12 billion) with payments limited to reimbursing farmers for lost crops," said Nomura analyst Shigeki Matsumoto.

"However, if it remains unstable, meaning long term or permanent evacuation, then the cost will balloon beyond TEPCO's means. In that case the government will have to pick up the portion of compensation costs that TEPCO can't pay."

It could take months to stem radiation leaks, one official warned, and even longer to regain control of the power station.

Under law, TEPCO could be exempt from compensation for nuclear accidents caused by natural disasters. But in this case, Chief Cabinet Secretary Yukio Edano said in March that "it is impossible that Tokyo Electric would easily be exempted from liability for this accident."

More than 70,000 people have been evacuated from a 20-km (12 mile) evacuation zone around the Fukushima Daiichi plant. Another 130,000 people, who live in a 10-km (6 mile) band beyond the evacuation zone have been advised to leave or stay indoors.

If the government stepped in to rescue TEPCO, it could also be assuming considerable debt.

Before the disaster, the company had $91 billion in debt on its books. Since the catastrophe, it has signed a $24 billion bank loan, which Chairman Tsunehisa Katsumata warned might not be enough to keep the company going.

Added to which, Nomura estimates that TEPCO is paying more than $1 billion a month for oil and gas to make up for lost nuclear power generation capacity.

© 2022 Thomson/Reuters. All rights reserved.

Japan's government expects last month's earthquake and tsunami to cost up to $300 billion in material damage, but the ultimate cost will be far higher. Tokyo Electric Power Co. (TEPCO), operator of the crippled Fukushima nuclear power plant, could leave the government...
Japans Final Disaster Damage Bill May be Staggering
Monday, 04 April 2011 10:44 AM
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