Japan Recovery Effort Could, Eventually, Create Economic Spark

The earthquake and tsunami that struck Japan on Friday could ultimately spur economic growth as the recovery effort creates demand for goods and services needed to repair and replace devastated industries, buildings and infrastructure.

Research firm Capital Economics said in a note released shortly after the massive quake that while economic activity usually falls following major natural disasters, the reconstruction work that follows has historically created demand for labor and construction materials, as well as  machinery, which provides a spark for economic activity.

Indeed, shares of heavy machinery manufacturer Kubota Corp. (NYSE: KUB) were up in midday trading Friday on the certainty that such companies will play a significant roles as the recovery effort gears up in the coming days and weeks.

The earthquake has shut down ports, power plants and refineries and analysts expect Japan’s already-stagnant economy to stumble even further in the wake of the disaster. Despite being the third-largest economy in the world, Japan’s economy has stagnated for nearly two decades.

Initially, the disaster will add to Japan's economic woes. But the effects should be temporary."In the short term, the damage could even knock off almost 1% of the country's GDP," said David Cohen, an analyst at regional economic commentators Action Economics.  "Longer-term, though, it will balance out, through the rebuilding exercise which will be positive for growth with all the construction taking place. It could turn positive in about 12 months."

Akuji Okubo, chief economist at Societe General, added in a research note,“I think we will see industrial production suffer one day’s loss of output in March at most and with (southern Japan) mostly intact I think the impact, even for manufacturers, will be limited, as they may be able to shift production to southern regions.”

The damage, while still being assessed, appears to be extensive. News agencies in Japan showed images of waves estimated a nearly 30 feet sweeping inland and washing away countless homes, cars and businesses. There are hundreds of confirmed deaths, but many more expected. The region’s Sendai airport has been inundated by flood waters.

Aerial footage taken from helicopters has revealed severe flooding in northern coastal towns, where the waves tipped massive cargo vessels on their sides and sent fishing boats crashing inland.

Tsutomu Yamada, a market analyst with Kabu.com Securities, told Reuters that the effort should begin immediately and it should start with a swift response from the government.

"The extent of the damage is hard to tell but it seems devastating for the northern Japan economy. The government must act quickly to announce support packages and the central bank should pump more money into the economy," he said. "Some manufacturers have factories in the quake-hit area and they will face challenges in rebuilding these facilities. But what's more important is that this quake could hamper Japan 's overall economy which just started showing some positive signs."

Capital Economics noted that Japan was “much better prepared for this kind of disaster than it was in 1995” when a massive quake struck Kobe. The Kobe earthquake left more than 6,400 people dead and caused damage estimated at 10 trillion yen.

Richard Jerran, chief Asian economist at Macquarie, said Japanese companies apparently learned an important lesson from the Kobe disaster, one that should help during this recovery.

“Inevitably there will be microeconomic disruptions, as there were after Kobe and even Chuetsu (a 2004 quake). However, many firms reportedly diversified supply chains in the wake of Kobe, so the impact should be lower,” he said.