BNP On The 13% Of Japanese GDP That Could Now Evaporate

japan chart

Photo: BNP

BNP is the latest firm to take a stab at the earthquake’s impact on the GDP of Japan.Here’s the simplest, headline number:

GDP level could drop 13%, reducing growth by 3% How much economic damage could supply constraints cause? In all honesty, it is hard to tell because there are too many uncertainties. (Remember, no one ever imagined the Lehman shock would cause the economy to contract 10%.) Nevertheless, if we assume that economic activity in all affected regions—Tohoku, Hokkaido, 9 prefectures managed by Tepco—is reduced an average 25% over the coming months, that would lower the level of nation’s total economic activity by roughly 13%. If this were to continue for a full quarter, GDP growth in 2011 will be reduced by about 3%. That said, the 9 prefectures managed by Tepco have not sustained significant earthquake or tsunami damage, so economic activity in these areas should quickly return to normal once the rolling blackouts end. Thus, if the power rationing indeed stops in late April, the negative impact on growth in 2011 from supply constraints would be smaller, at about 2%. In any event, the economy will face major supply constraints moving forward.

One interesting subcomponent is the impact of the rolling blackouts:

Rolling blackouts could impact 40.1% of GDP
Compounding matters is the problem of power generation in the wake of the shut down of damaged nuclear power plants that has prompted Tepco to institute rolling blackouts that will weigh on economic activity in the nine prefectures affected: Tokyo and its eight neighbours (Ibaraki, Tochigi, Gunma, Saitama, Chiba, Kanagawa, Yamanashi, and part of Shizuoka). These nine prefectures account for 40.1% of GDP. Currently, the rolling blackouts are scheduled to last until the end of April, with the aim of reducing total power consumption in these 9 prefectures by an average 25% (under normal conditions, Tepco generates 41 million kilowatts but that will be reduced to 31 million). Of course, electrical power is not required for all forms of economic activity, but considering the constrictions that blackouts will have on distribution, damage to the economy from power rationing will inevitably be significant. Additionally, while central parts of Tokyo (most of Tokyo’s 23 wards, where many companies operate) are currently exempt from the blackouts, the disruption of distribution systems and rail networks in and out Tokyo means economic activity will be substantially hampered.

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