The Economic Aftershock of Japan

image: USA Watchdog

The news from Japan is grim. At least 10,000 people are reported dead from the killer quake that rocked the island nation last week. Likely, the death toll will go much higher in the coming days. There have been at least 3,400 buildings destroyed by the flood of a 3 story tsunami, the 8.9 earth quake or by fire. Oil refineries were damaged and shut down. Roads and bridges were destroyed by the quake and the rail system was wiped out in some areas. On top of all this, several nuclear reactors are badly damaged and one even exploded.

A Reuters story said yesterday, “A grim-faced Prime Minister Naoto Kan described the crisis as Japan’s worst since 1945, as officials confirmed that three nuclear reactors were at risk of overheating, raising fears of an uncontrolled radiation leak. “The earthquake, tsunami and the nuclear incident have been the biggest crisis Japan has encountered in the 65 years since the end of World War II,” Kan told a news conference. . . . As he spoke, officials worked desperately to stop fuel rods in the damaged reactors from overheating. If they fail, the containers that house the core could melt, or even explode, releasing radioactive material into the atmosphere.” (Click here to read the complete Reuters story.) The question regarding containment of the damaged nuclear reactors in Japan is a big one. And, assessment of lasting damage to the surrounding areas is also in question.

8.9 magnitude earthquake is the “Black Swan” of black swan events. (A “Black Swan” event is something random and totally unpredictable. This term was coined by Nassim Nicholas Taleb, a finance professor and former Wall Street trader.) No one could have seen this enormous quake and its aftermath coming. However, now that much of the damage is done, we can anticipate some of the economic aftershocks from Japan.

On the oil front, it looks like prices will go down because Japan will not be using as much oil in the near term. The economy there is understandably grinding to a halt. Rescue operations and humanitarian missions are in full swing. Humanitarian needs of millions of people will continue for weeks and even months. When things do settle down, construction companies get work rebuilding Japan, but rebuilding is not the same as business expansion. Rebuilding is just getting things back to where they were before the quake, but regardless, Japan will rebuild its cities, roads, refineries, rail system and infrastructure. That will take money–and lots of it.

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