The 9.0-magnitude earthquake that rocked Japan does not make a fiscal crisis in the county imminent, says Tom Byrne, Senior Vice President at Moody’s Investors Service. But such a crisis may be shifted forward because of the disaster, “unless Japan’s political parties are galvanized by the crisis to also address the country’s long-term fiscal challenges.”
Japan Can Absorb Quake Costs, Says Moody's
In a report released on March 14, Moody’s judged that Japan’s economy still has the ability to absorb the shock. “In general, large, wealthy economies demonstrate a capacity to absorb localized natural disasters,” Byrne argued, pointing to the country’s “ample domestic savings” and net international assets that equaled 59% of GDP in 2009.
“Reconstruction spending will likely prove to be a very effective and justifiable fiscal stimulus,” he added. “Such expenditures will likely offset the economic impact from the immediate losses in production and demand” – as what happened in the aftermath of the 7.3-magnitude earthquake that leveled parts of Kobe in 1995.
It is too early to assess the extent and severity of the economic damage from last week’s earthquake, but the 1995 temblor caused more than US$150 billion in damage, about 2.5% of GDP, making it among the most destructive disasters of the recent past. In comparison, Hurricane Katrina in the U.S. is estimated to have caused about US$200 billion in economic damage.
Moody’s expects the yen to remain stable, which will help minimize the financial impact of the disaster. The Japanese currency traded at around 82 yen to the dollar on March 14, virtually unchanged from before the earthquake.
“We recognize that the immediate focus of the government must be on emergency relief and reconstruction efforts, no matter what the fiscal cost,” wrote Byrne. “Indeed, both the ruling and opposition parties agree on the need for a quick and effective response to the crisis.”
“But we have yet to see a commensurate sense of unanimity and urgency to address the longer term need for fiscal and economic reform and debt containment,” Moody’s concluded.
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