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Aftershocks: Damage only beginning for Japanese business

Aftershocks for the economy include lost man-hours and sales. Japan will have to quickly rebuild infrastructure damaged by the quake and its aftershocks if its businesses are to rebound soon.

By Business editor / March 11, 2011

Cars and containers are swept by a tsunami wave in Miyako port in this still image taken from video March 11, 2011. Japan's biggest earthquake since records began hit the northeast coast, triggering a 10-metre tsunami that inundated everything in its path as well as severe aftershocks.

TBS via Reuters TV/Reuters

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For Japan, the worst of the earthquake damage has already happened. For Japanese businesses, it’s only beginning.

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The quake, the biggest to hit Japan in centuries, and the resulting tsunami that swept homes and cars out to sea, has caused tens of billions of dollars of property damage, by some early estimates. But the economic aftershocks – the longer-term damage to the island nation's businesses – won’t be known for months or years as the indirect effects of the quake kick in.

In natural disasters of this magnitude, business interruption can be huge. Damaged factories and offices mean that goods don’t get produced and sales don’t happen. Damaged roads and lack of power mean that workers can’t get to their jobs or work reduced shifts. Eventually, government aid and business catch-up, mitigate some of these losses.

For export-reliant Japan, the depth of the downturn in business will depend on the speed with which its transportation facilities and ports can come back on line.

“The business interruption is pretty significant, especially when there is a lot of property damage,” says Adam Rose, a research professor at the University of Southern California’s policy and planning school and an expert on the economic impacts of large-scale disaster. “There's no question of it being devastating to that province [hit by the tsunami]. As far as Japan as a whole is concerned, it’s not small. But it's probably not devastating.”

For businesses in northern Japan, which absorbed the worst of the shaking, the damage was substantial. All three of its major automakers felt the effects. A Honda worker died and 30 workers were injured when walls and parts of a ceiling crumbled at Honda’s research facility in northeastern Tochigi prefecture.

Toyota stopped production at two assembly plants. Nissan shut down five of its plants.

In addition, the quake-induced tsunami may have caused salt-water intrusion in the heavily agricultural region, which may take years for farmers to recover from, Mr. Rose says.

The rest of Japan also felt the effects of the temblor. It shook buildings in downtown Tokyo and shut down cellphone service. Millions of homes across Japan were left without electricity, because of power plants being shut down, including nuclear reactors. Bullet trains, commuter rail, and subways ground to a halt.

The 8.9 magnitude earthquake – the most powerful in the region for 1,200 years, according to the U.S. Geological Survey – could cost the insurance industry $10 billion, according to one analyst. But liability is limited because it hit a more remote area of the country and because a minority of Japanese households buy earthquake insurance.

The business interruption costs, however, could easily reach 50 percent or even 100 percent of those insurance costs, Rose says.

That total won’t be known for months or even years, because business interruption drags on. Kobe, Japan, hit by a huge earthquake in 1995, took more than four years to recover, he adds. New Orleans, hit by hurricane Katrina in 2005, is still recovering.

The earthquake couldn’t have come at a worse time for Japan’s economy, writes Julian Jessop, an economist with Toronto-based Capital Economics, in an analysis. “Japan’s economic recovery has lost momentum and a large part of the reconstruction costs will add to the government’s significant debt burden. It will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster.”

– Material from the Associated Press was used in this report.

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