Japan's Economy Shaken by Quake; Damage May Be Costliest Ever

The human cost of last week's earthquake and tsunami in northern Japan is now well known. At least 10,000 people are thought to have died in the tragedy and another 500,000 have been left homeless. What's less clear is the long-term damage this natural disaster may have caused the country's economy, which has been struggling for years.

Already, the country may be ringing up the largest reconstruction bill ever following a natural disaster. That bill, Credit Suisse estimates, is likely to top $170 billion -- which would surpass the $123 billion in damage Hurricane Katrina did to the U.S. Gulf Coast in 2005 and the Kobe, Japan, quake of 1995 ($131.5 billion).

Almost every Japanese business -- whether inside or outside the disaster zone -- has been affected by the quake and tsunami. Across the country, companies have suffered electricity shortages following the shutdown of four nuclear power plants damaged in the 9.0-magnitude temblor.


Lacking a steady power supply, automotive firms such as Toyota have been forced to temporarily close production lines. The carmaker isn't expected to reopen its domestic factories until Thursday at the earliest -- leading to a production loss of 40,000 cars. Electrical giant Sony has also suspended work at six component plants, and Japan's beer giant, Asahi, is slashing output and shuttering several breweries.

With production predicted to dip, and no end in sight to radiation leaks at the Fukushima atomic power plant in northern Japan, Japanese stock markets have gone into meltdown. On Monday, the Nikkei 225 stock average slumped around 6 percent. But the value of major Japanese multinationals fell more: Sony and Nissan saw their shares drop by more than 9 percent, while Toyota's tumbled 7 percent. And after Prime Minister Naoto Kan today warned residents living within 19 miles of Fukushima to stay indoors or risk radiation sickness, the Nikkei plunged another 14 percent.

Tsunami Relief: Network for Good

Japanese financial institutions have suffered especially heavily in the rout, with shares in banking group Mizuho falling by 11 percent on Monday and 10 percent today. That's because international investors doubt whether the country's banks can afford to finance reconstruction in the disaster zone.

To ease investor concerns, the Bank of Japan has pumped $282 billion into the banking system over the past two days. Those funds should help Japanese banks stay afloat and meet the inevitable surge in demand for post-earthquake loans. And in coming days, authorities will likely tap the bond market to help pay for the country's rebuilding. But all of these efforts will add to the country's already enormous national debt, which sits at around 228 percent of gross domestic product -- more than twice the ratio in the U.S.

Credit agency Moody's today warned that any additional debt could bring forward the "tipping point" where investors lose confidence in Japan's finances. Moody's said the disaster "does not make a fiscal crisis in Japan imminent," but any loss of market confidence could drive up the yields (or financial returns) that investors demand from Japanese bonds.


And if the market demanded higher yields, then Japan's government will have to slash borrowing at the precise moment "when the imperative of rebuilding the country will require a massive deployment of government money," writes Robert Peston, the BBC's business editor.

Even if those predictions of a coming debt crisis are exaggerated -- as some commentators argue -- the quake and tsunami will likely delay a return of growth in the Japanese economy. The nation's economy shrank in the last quarter of 2010, and many analysts predict that it will contract throughout the first half of this year. If the blackouts continue until December, though, Goldman Sachs has warned that the economy could keep retreating for the entire year.

That's a painful blow for this quake-ravaged country, which has seen little growth for almost two decades and last year lost its place as the world's No. 2 economy to China.