Economic tremors of Japanese quake stay local

Two months after a massive earthquake and tsunami in Japan, the economic tremors continue to ripple outward, but the March 11 disaster has not turned out to be the global financial calamity as predicted.
Japanese soldiers offer a silent prayer for the dead in Kesennuma, Japan last month. The full financial toll of the disaster has yet to be calculated. (Kazuhiro Nogi/AFP/Getty Images)

Two months after a massive earthquake and tsunami in Japan, the economic tremors continue to ripple outward, but the March 11 disaster has not turned out to be the global financial calamity some said it might be.

To be sure, the Great Tohoku Earthquake, as the initial tremor is officially known, had a significant economic impact. Initial estimates ranged in the tens of billions of dollars, but Japanese government forecasts have since said the true cost is closer to $300 billion.

Native Japanese firms have been hardest hit, that much is clear. Automotive giant Toyota revealed its quarterly results on Wednesday, and the results were not pretty. The world's largest automaker saw profit decline by more than 75 per cent in the first quarter.

The Japanese fiscal year ended only three weeks after March 11, but in that time, the company says it lost 170,000 vehicles worth of global auto production, and suffered 110 billion yen (roughly $1.3 billion Canadian) worth of financial damages. Production remains at less than half of what it was before the quake.

"Our priority is to get our production back to normal and recover from the disaster," a grim-faced CEO Akio Toyoda told reporters Wednesday. "By reviving our company, we want to help bring Japan's comeback," he said.

Toyota Motor Corp. President Akio Toyoda, shown Wednesday, told journalists the automaker's priority is to get production back to normal and to recover from the earthquake and tsunami. Shuji Kajiyama/Associated Press

Japanese automakers as a whole were forced to slash production in Japan by 57 per cent in March compared to the same time last year, a Scotiabank report published this week found.

Despite the massive scale, from an insurance perspective, the disaster is likely to have a relatively minor impact.

That's because for a country situated on one of the world's most active geological fault lines, earthquake insurance is fairly uncommon. Less than one-fifth of Japanese homes and businesses are covered. The ratio is even smaller outside the great cities of Yokohama, Tokyo, Nagoya and Osaka.

Even inside the insurance coverage that exists, the economic tremors are unlikely to spread very far. Much like the Japanese public's tendency to finance their own sovereign debt, Japanese insurance companies keep much of the costs domestic by reinsuring each other.

They also draw from the Japanese government's unique Earthquake Insurance System which is believed to backstop earthquake related losses of up to $50 billion.

A dairy farmer dumps milk in a corn field in Iitatemura Japan last month. The country's economy was hit hard by the nuclear scare. ((Takuya Yoshino/Yomiuri Shimbun/AP))

A report this week from risk modeling firm Eqecat put the total insurable loss at between $22 billion and $39 billion.

"The expectation is that much of the costs will be contained in Japan with the Japanese government and Japanese insurance companies," Paul Kovacs of the Institute For Catastrophic Loss told CBC News recently.

By some accounts, insurance is one of the biggest industries in the world, as insurers took in more than $4 trillion last year alone. Against that backdrop, costs in the $10 billion range "in today's world are something that the insurance industry can handle," Kovacs said.

Columbus, Ga.-based Aflac Inc. is one of the biggest foreign players in Japan's insurance market, selling health or life insurance to one out of every four Japanese households. While it expects claims to be high, it is "well-prepared" to cover them, the company said in the quake's aftermath.

Nuclear impact

One industry that was alleged to have been in its death throes  after the Fukushima Dai-ichi reactor starting spewing deadly radiation into the atmosphere is the nuclear industry.

But here, too, two months on, it seems reports of uranium's demise have been greatly exaggerated.

Cameco is one of the world's largest uranium miners. The stock closed at $36.51 on the TSX  the day before the quake, before plunging precipitously in the days that followed. It recovered somewhat, but was still trading at $26.68 on Wednesday — a full 27 per cent decline from its former highs.

Investors have been running away in droves, but the reality is that Cameco's core business has proved surprisingly resilient. The company did reveal in its quarterly results last week that profit dropped to $91 million in the first quarter, down from $143 during the same period last year.

But at the same time, the company reaffirmed its commitment to double annual uranium production by 2018 to meet anticipated growth in the nuclear industry. And the company noted that scheduled uranium deliveries are heavily weighted to the second half of 2011 to begin with.

"Our business is supported by an extensive portfolio of long-term sales contracts and solid customer relations built over decades," CEO Jerry Grandey said after Japanese nuclear concerns began to surface. "Looking beyond these few days, we don't see an impact on our business," he said.

It's a similar picture at rival Uranium One Inc. On Wednesday, the company said first-quarter profits rose to $14 million, compared to a loss during the same period a year ago.

The miner noted that it has felt the effects of lower uranium demand from Japan as the country shut down its nuclear industry. But the company said there is a recovery starting, and a trend that shows global demand should return.

Ultimately, the true financial toll of the disaster will only be decipherable looking backwards, after Japan has rebuilt. And it's likely to pale in comparison to the human toll, which seems destined to be in excess of 20,000 lives lost.

"Given the current uncertainty … it is difficult to predict the financial impact that the event will have," ratings agency Fitch said.