Sunday, March 13, 2011

Japan Quake, Tsunami, Nuclear Meltdown to Exact $100 Billion Economic Toll

The 8.9 earthquake that struck off the coast of Japan near Sendai Thursday is a human tragedy of enormous proportions. The number of people who have lost their lives in the ensuing Tsunami could exceed 10,000. And for those who live in Tokyo, which did not receive the full brunt of the damage, the shut-down of some of its trains left many to walk home after the quake -- one colleague spent over 10 hours walking 40 miles to get home.

Beyond this human cost, insurance companies and the nuclear power industry are likely to pay an economic toll of at least $100 billion, according to a risk modeler, Equecat interviewed by Reuters. That $100 billion represents about a third of the value of the property in the insured regions. Reuters reports that American International Group (AIG), ACE Ltd (ACE), Munich Re (MUVGn) and Swiss Re (RUKN) are likely to be exposed to some of that damage. However, only about 14% of Japanese property owners have earthquake insurance, so it's likely that the Japanese government will pay much of the rebuilding costs.

The expected economic damage is far higher than many recent quakes. For comparison, here are a few of the larger quakes in the last 20 years and their economic costs:
  • Kobe's January 1995 7.1 quake generated damage that cost over $100 billion, according to the BBC.
  • Northridge's January 2004 6.7 quake took $45 billion to repair the wreckage it left in its wake, according to
  • Chile's February, 2010 8.8 quake was estimated to cost between $15 billion and $30 billion, according to the Economist.
  • San Francisco's October 1989 7.1 quake cost between $6 billion and $8 billion to fix, according to vibrationdata. 
Moreover, the nuclear power industry is likely to pay a significant price as a result of the Japanese catastrophe. Two Japanese nuclear plants were partially melting down on March 13 and others were also at risk -- threatening to release radioactive material into the atmosphere. 

These reactors' inability to withstand the earthquake and tsunami calls into question the safety of the industry and is likely to raise questions about the safety of nuclear plants in the U.S., such as California's Diablo Canyon (near San Luis Obisbo) and San Onofre (in San Clemente), that lie on earthquake faults, according to the Washington Post. Nuclear power accounts for 30% of Japan's energy supply and 20% of the U.S.'s.

What happens next is unclear, however, the economic damage from this tragedy is likely to rise. In its wake, the demand for energy is likely to shift away from nuclear and towards more sustainable sources. And the insurers that pay for the cleanup are likely to raise their rates as they seek to rebuild their depleted capital.


Blogger Carry Trader said...

Hi Peter,
BOJ has expaned the QE program to 10T Yen to aid the recovery. However it needs to be signficantly bigger to have a meaningful impact.

Intrinsic Value

6:29 PM  

Post a Comment

<< Home