Understanding Japan’s Disasters

In order to comprehend the economic and financial effects of Japan’s calamity, many have been quick to cite the aftermath of the terrible 1995 Kobe earthquake. But that analogy is too limited to understand what lies ahead, and relying on it could undermine appropriate policy responses, both in Japan and abroad.

NEWPORT BEACH – As we all struggle to comprehend the economic and financial impact of Japan’s calamity, it is tempting to seek historical analogies for guidance. Indeed, many have been quick to cite the aftermath of the terrible 1995 Kobe earthquake. But, while that example provides some insights, it is too limited to understand what lies ahead for Japan, and excessive reliance on it could undermine appropriate policy responses, both in Japan and abroad.

First, let us consider the similarities between Japan’s current tragedy and that of 1995. Both involved terrible earthquakes that resulted in tremendous human suffering and large-scale physical damage. Both required the Japanese government to display considerable agility in its rescue efforts. Both triggered multiple offers of help from friends and allies around the world. In both cases, wealth destruction was accompanied by disruptions to daily economic life.

There are also important forward-looking similarities. As with the aftermath of Kobe, the current focus on rescuing survivors will be followed by a huge reconstruction program. Massive budgetary allocations will be made (2% of GDP in the case of Kobe). Affected households will receive financial assistance to help them restore some normalcy to their lives. Roads, housing, and much other infrastructure will be repaired and upgraded.

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