Ongoing series of aftershocks following a major earthquake that hit Kyusyu have begun to affect industrial production in other areas, weighing on retail sales and tourism and postponement of tax hike.
By Harumi Taguchi, Principal Economist, IHS Global Insight
Key Points:
- On 14 April, a magnitude-6.5 earthquake that hit Kumamoto prefecture in the southern main island (Kyusyu) of Japan was the largest felt there since 2011.
- The initial earthquake killed nine people and damage was concentrated to Mashiki, east of Kumamoto City (the capital city of the prefecture) and other cities near the epicenter.
- The earthquake has been unusual in that it was followed by an even larger earthquake (magnitude-7.3) two days later, and the incidence of aftershocks accelerated and spread to the Aso area and Oita prefecture (eastern Kyusyu).
- Over 2,600 houses have completely or partially collapsed, nearly 63,000 homes are without electricity, and nearly 250,000 houses are unable to access the water supply. This forced over 110,000 people to evacuate their homes and into shelters.
- Work to repair major roads and train lines has begun, but the scale and extent of mudslides, derailments, and collapsed facilities makes it difficult to deliver necessities to residents and carry out relief operations.
- Kumamoto’s airport has reopened but is not fully functioning because of damage to its terminal building.
- Rain could cause to delays with repair work and, in worst case, further disasters, given unusual heavy rainfall in June and July rainy season in the recent year.
- BREAKING: A magnitude 5.5 aftershock has been detected in Japan’s Kumamoto prefecture at the time of writing.
IHS Analysis:
The damage from the Kumamoto earthquake should be less than compared with the 2011 East Japan Earthquake, which is estimated to have reached JPY 16-25 trillion, or 3-5% of GDP, excluding damages from Fukushima nuclear power plant accident. Although the costs for the Kumamoto earthquake are still work in progress, initial figures for the damage to houses and infrastructure is expected to be smaller than those of the 2004 Nigata Chyuetsu Earthquake, which cost over JPY 200 billion for rebuilding of infrastructure and agricultural facilities.
While the extent of the damage to manufacturing facilities is still unclear, IHS estimates the damage at around JPY300-400 billion. It remains to been seen whether prolonged aftershocks could lead to continued shutdowns of factories and further limiting supplies to retailers in the region, which will weaken business and consumer sentiment, and in turn, weigh on economic growth in the second quarter. The Kumamoto and Oita prefectures account for 2% of nominal GDP and 2% of the manufacturing sector. But it has a relatively high share of total production in agriculture, forest and fisheries (5%), non-ferrous metals (3%), electric machinery (3%), and precision instruments (5%).
There has been over 600 aftershocks (as of 19 April), which has made it difficult for manufacturers, including Honda, Daihatsu, Sony, and Mitsubishi Electric, to restart operations. The repercussions from this have gradually spread to other links in the supply chain to a greater extent than was initially expected. For example, Toyota decided to suspend nationwide operations until 23 April due to lack of parts made by an affiliate company based in Kumamoto. A steep decline for February industrial production partially reflected shutdowns for auto factories due to a lack of special steel. Although the outlook in the February’s survey anticipated a solid recovery for production in April, delays in restarting operations could weigh on production in the second quarter and push a recovery back to the third quarter.
Work to rebuild housing and other reconstruction work will offset some downside, but the earthquakes’ effect on tourism is another cause for concern. All three major earthquake centers are near popular tourism attractions, including Kumamoto Castle built in the 17th century, the world’s second-largest active caldera volcano, popular hot springs spots, and other points of interest. About 6 million people visited Kumamoto and Oita prefectures in 2015 with each attracting 600,000 visitors from abroad. The number of visitors to Japan from abroad grew by 47.1% year on year to 19.7 million in 2015, thanks to yen weakening and the relaxation of tourist visa requirements. Because of weak domestic demand, solid spending by inbound tourists helped underpin the regional economy. However, earthquakes, in addition to recent yen strengthening will suppress the number of visitors to Japan and their spending.
The government is expected to declare the region a disaster zone as it proceeds with rehabilitation and repair, prompting an accelerated tax allocation to local governments. The government will initially use it reserve funds and consider further stimulus, including rehabilitation plans, later in the year. Prime Minister Shinzo Abe has said he still plans to raise the consumption tax from April 2017 as scheduled; however, the damage caused by the Kumamoto Earthquake will put this into doubt. Japan has already been hampered by weak external and domestic demand along with a strengthening yen which will further dampen business sentiment. IHS believes cumulative downside risks have made the likelihood of the next scheduled tax hike being implemented as a fifty-fifty proposition.