Japan's Biggest Earthquake in Living Memory

The undersea earthquake that hit Japan on Friday afternoon was continually 'upgraded' as time went on. Initially graded as a 7.9 point quake on the Richter scale (which is bad enough), it soon became clear that the earthquake was in fact the biggest ever recorded in Japan – a stunning 9.0 on the Richter scale, more than one thousand times stronger than the earthquake that devastated Christchurch a few weeks earlier.

 

In the aftermath of the earthquake and the huge tsunami it produced it also became increasingly clear that the scale of destruction and the number of victims were far higher than was initially widely assumed.

Two major tectonic plates meet just in front of Japan's Pacific coast, the Asian and the Pacific plate. As a result, Japan is regularly struck by seismic activity. Only 16 years ago, a major earthquake destroyed Kobe, in what was then one of the worst natural catastrophes to ever strike Japan. However, the earthquake on Friday easily dwarfed the Kobe temblor. It is estimated that  Japan's main island was shifted by about 2.4 meters (about 8.2 feet) by the earthquake, while the earth's axis was concurrently tilted by about 10 centimeters (approx. 4 inches).

At first observers believed that the fact that the epicenter of the earthquake was some 125 kilometers (80 miles) off the northern coast of Japan meant that it would likely do less damage than the Kobe quake. Alas, the destruction wreaked by the tsunami wave has turned out to be shockingly extensive. Entire towns were swept away, such as e.g. Minamisanriku in the Miyagi prefecture, a 17,000 inhabitants port, where essentially only the hospital building was left standing. More than half of the population of the town is unaccounted for, which is a hint that the overall death toll could rise considerably from the initially estimated figures.

 


 

An aerial view of Minamisanriku after the tsunami wave has hit. The white building is the town's hospital. Nearly 10,000 people are unaccounted for in this town alone.

 


 

Japan's prime minister Naoto Kan spoke of  'Japan's worst crisis since WW2' and that is certainly no exaggeration.

A broad overview of the damage in the form of pictures and video footage can be found at the BBC, here and here.

The reason why a tsunami wave is so extremely destructive (and this particular wave was quite high, reportedly measuring between 7 to 10 meters = 23 to 33 feet) is its extraordinary wave length, which can be several hundred meters long. This large wave length differentiates tsunami waves created by undersea earthquakes from normal wind waves. It explains the unrelenting progress of  a tsunami wave after impact – the mass of water is simply enormous.

The precise death toll in Japan remains unclear as of this time, but recent estimates speak of more than 10,000 casualties, which is a very large number for a nation that due to bitter experience is better prepared to deal with earthquakes than most. Even higher figures regarding the likely final casualty count have in the meantime been mentioned by officials engaged in the rescue efforts. Given the fact that almost 10,000 people are missing in Minamisanriku alone, they may well turn out to be right.

 

  

Murphy's Law Goes Nuclear

  

Japan imports most of the natural resources it uses, so it must have seemed a good idea to build 55 nuclear reactors in the country. Unfortunately, nuclear reactors and severe earthquakes followed by tsunami waves don't go all that well together as has now become clear.

The Fukushima Daiichi nuclear plant has seen three of its reactors lose their cooling systems. Some of these are very old reactors, built in the 1960's. As far as is  known at the moment, the problem with the nuclear plants was a real life application of Murphy's law ('everything that can go wrong, will go wrong'). First the tsunami wave downed the main electrical lines, cutting power to the pumps of the cooling systems. Next the back-up generators failed, likewise damaged by the tsunami. This left only batteries as a fail-safe power source, but the batteries' life is limited to eight hours and it simply wasn't possible to restore electrical power to the pumps in time. The nearby Fukushima Daini plant has also experienced coolant loss at three of its reactors. There are now altogether six nuclear reactors in danger of melting down, however the situation is most dire at the Fukushima Daiichi plant. The authorities have in the meantime evacuated over 200,000 people living in the vicinity of the plants, which illustrates the severity of the situation much better than the constant attempts by the same authorities to exude calm via their public announcements. At present 190 people are said to be treated for radiation poisoning in Japan's hospitals.

One of the measures to lower the pressure inside the reactors was to vent radioactive steam, which is apparently a fairly harmless procedure.  However, hydrogen has also built up in the plants, and the  Fukushima Daiichi plant has in the meantime been rocked by two explosions. Allegedly these explosions did not do any damage to the reactor cores, only to the buildings surrounding them. Footage of the first explosion is not particularly reassuring to a layman's eyes as it were. According to official statements, the radiation around the plant has risen to more than 'twice the legal maximum', to 1,204 microsieverts per hour.

 


 

The first hydrogen explosion at Fukushima Daiichi nuclear plant Unit One. Ironically, this reactor unit was slated to be decommissioned in February, but its operating license was extended for another ten years.

 


 

The second explosion occurred at the plant's unit three, following an aftershock that measured 6.2 on the Richter scale (roughly equivalent to the Christchurch quake)  – and this is so far the most worrisome development. According to the most recent (at the time of writing) official statements, both reactor cores have undergone 'partial  meltdown'. Following the breakdown of the cooling systems, engineers have begun to pump seawater mixed with boron acid into the reactor cores – however, the fuel rods have not been entirely covered in water all the time, which has led to the partial meltdown.

What makes the number three unit's reactor especially noteworthy is that it is not a mere uranium reactor. Its fuel is so-called MOX fuel, a blend of enriched uranium and plutonium oxides that is created by reprocessing spent uranium fuel. The most obvious problem posed by this is that MOX fuel tends to run much hotter than low enriched uranium. It requires a higher number of control rods and presumably its meltdown proclivity is increased by this characteristic – i.e. it is far more difficult to deal with a loss of coolant to a MOX reactor than to a normal uranium reactor.

Moreover, should the MOX reactor suffer a complete meltdown, there is a danger that plutonium fallout could result, which would have far more serious health implications than the fallout from a low enriched uranium reactor meltdown.

One thing is already clear: pumping seawater mixed with boron acid into the reactors is a desperate measure. It basically tells us that all hope of fixing them has been abandoned. Given the admission that a partial meltdown has already occurred, it appears highly likely that the stricken reactors will eventually have to be entombed in concrete.

Addendum to this section: Japan's authorities apparently say now that they expect a third explosion at the plant. It sounds like a gamma-ray emitting house of cards.

 

Economic Consequences

According to a major disaster modeling company,  the earthquake will likely be the most costly disaster ever experienced by the insurance industry. The firm's initial estimates speak of up to  $35 billion in insured property losses alone:

 

THE earthquake that devastated parts of northern Japan caused as much as $US35 billion ($34.5bn) in insured property losses, a figure that would mark Friday's quake as the costliest ever for the insurance industry even before the effects of the tsunami are factored in, according to a disaster – modeling company.

While the actual cost of the catastrophe will take months to become clear, Boston-based AIR Worldwide said today the quake alone caused insured property losses of $US15bn to $US35bn. If claims come in at the middle of that range, the cost of the disaster would surpass all other natural catastrophes besides 2005's Hurricane Katrina.

Loss estimates from AIR and its rivals are closely watched by the insurance industry and by Wall Street to gauge potential losses for individual insurers.

No major companies have disclosed estimates of their own losses yet, but the size of AIR's estimate will fuel conversations in the industry — already underway – about whether the quake will force an abrupt spike in the price of insurance and reinsurance.

Such a spike would be felt by businesses and homeowners in catastrophe-prone areas around the world, including Florida and California.

AIR's loss estimate includes "insured shake and fire-following damage to onshore residential and commercial buildings and contents, and to properties in agricultural line of business," but doesn't include the potential increase in the cost of building supplies and other materials that often occurs after a disaster, AIR said.

The estimate doesn't yet include estimates for the loss caused by the tsunami, the risk- modeling agency said.”

 

In addition, at least 9% of Japan's power generation capacity is at the moment off-line, which will create a temporary loss of production, as well as spiking refinery margins across South East Asia. There are currently millions of people  without water, electricity, or heat – and a large number without a roof over their head.

It is also worth pondering what the problems with the nuclear plants will do in terms of public resistance to nuclear energy generation. As can be imagined, Japan is particularly sensitive to this question. As noted by a Reuters columnist:

 

“The public demands nothing less than perfection from the nuclear industry in terms of safety," Reuters columnist Christopher Swann wrote. "That's particularly true in Japan, the only nation to have endured a nuclear attack. Fear of radiation is deep-seated in the country – just look at its great cinematic export, Godzilla movies. So a minor lapse could prove a big setback – one that makes meeting the world's voracious demand for energy look still more intimidating." 

 

As a more immediate consequence, Friday's rise in the yen due to the expected repatriation of funds to Japan has in the meantime been reversed on account of a massive liquidity injection by the BoJ.  The  sharp decline in Japanese stock prices that began late on Friday has continued. As noted below, Japan's government will increase its deficit spending further, straining an already  extremely stretched fiscal imbalance even more.

As reported by Bloomberg:

 

“Prime Minister Naoto Kan is also preparing a fiscal response. Fiscal Policy Minister Kaoru Yosano said at a press conference the government still has 1.3 trillion yen in discretionary funds from the budget for the year through March 31 that can be allocated for quake relief.

“This earthquake affected a wide area, and it’s likely that the economic impact will exceed the 20 trillion yen in damage sustained during the Kobe earthquake” of 1995, Yosano said.

Finance Minister Yoshihiko Noda said it would take beyond the end of this month to compile the supplementary budget package.  Opposition leader Sadakazu Tanigaki told reporters in Tokyo yesterday he proposed to Kan a temporary tax to help fund the relief effort.

The central bank set up a task force after the temblor, and pledged in a statement March 11 to ensure financial stability and said it will do everything it can to provide ample liquidity. The BOJ extended 55 billion yen to lenders over the past two days to ensure cash was on hand for withdrawals by survivors. The money went to 13 financial institutions operating outside regular business hours in disaster-struck areas, the bank said in a statement yesterday, adding that it was checking on the scale of damage to lenders.

The quake struck hardest in Tohoku, the northern region of the main island of Honshu that accounts for about 8 percent of Japan’s gross domestic product.   Companies from Sony Corp. to Toyota Motor Corp. halted production after the quake struck 2:46 p.m. local time 130 kilometers (81 miles) off the coast of Sendai, north of Tokyo. Nissan Motor Co. said 2,300 new vehicles were damaged by tsunami surges. Tokyo Electric Power Co. yesterday was battling to avoid a meltdown at its Fukushima nuclear plant, and warned it will today begin rolling, periodic blackouts of Tokyo.

Declines in stocks may shake consumer confidence, which slid to a 10-month low in December as the government started to unwind economic stimulus measures. The economy had contracted in the fourth quarter as consumer spending and exports slumped, a decline economists had said would be temporary as a rebound in global growth fuels overseas demand.”

 

We are far less certain than the unnamed economists cited in this report that 'global growth' will come to the rescue. Admittedly, given Japan's negative contribution to global growth in the most recent quarter and its generally stagnating economy, a further slump in Japan's growth is per se not going to derail the global economy. However, we would caution here that there are already numerous signs that global growth isn't as strong as is widely believed. We would mention here as early warning indicators the sharp 'surprise'  decline in German exports, the even more surprising trade deficit recently reported by China and last but not least the fact that Hutchison Whampoa is cashing out of its investment in Chinese ports via an IPO. Hutch's chairman Li Ka-shing (whose name sounds suspiciously like the 'Ka-ching!' sound made by a ringing cash register) isn't Hong Kong's richest man for nothing. He presumably knows when to buy and sell.

We would also point out that there is evidently a broad consensus among economists that the loss of economic activity due to the catastrophe striking Japan is going to be inconsequential to global growth. While watching TV reports on Japan this morning, we were struck that this opinion was repeated by every single economist interviewed on the topic, as though it were  immutable dogma. We are always very suspicious of consensus opinions, especially those of professional economists. All that's needed at this point to practically ensure a global synchronized recession is Ben Bernanke publicly opining that Japan's economy doesn't matter to the rest of us.

The Nikkei index had no opportunity to properly react on Friday, as the earthquake struck during the final 15 minutes of trading. This morning it has made up for lost time.

As AP reported around noon, even a $184 billion liquidity injection by the BoJ could not keep the market from crashing :

 

“Japan's central bank is injecting a record 15 trillion yen ($183.8 billion) into money markets, while the Tokyo stock market nosedived Monday on the first business day since an earthquake and tsunami devastated the country's northeast and raised dire worries about the economy.

The benchmark Nikkei 225 stock average plunged about 641 points, or 6.3 percent, to 9,612.88, extending losses from Friday. The earthquake hit shortly before markets closed for the weekend.

Worries about the economic impact of the disaster triggered a plunge that hit all sectors. The broader Topix index was down more than percent. Shares of several major companies were overwhelmed with sell orders and had yet to trade.

Among those, the Tokyo Electric Power Co. was set to fall by double digits as it faced power shortages and second hydrogen explosion at a nuclear reactor Monday, sending a massive column of smoke into the air and wounding six workers. Toyota Motor Corp., the world's biggest automaker, tumbled 7.4 percent.

The Bank of Japan moved quickly to try to keep financial markets stable. By flooding the banking system with cash, it hopes banks will continue lending money and meet the likely surge in demand for post-earthquake funds. Central bankers were gathered Monday for a one-day policy board meeting.

"The Bank will continue to grasp the situation of the financial markets and business operations of financial institutions, and to stand ready to respond and act as necessary," it said a statement.”

 

The final tally saw the Nikkei close down by 6.18%, while the broader TOPIX lost 7.49%. In a first for Japan, the country is hit by 'rolling blackouts' as the Tokyo Electric Power Company is rationing electricity.

The decline of Japan's stock market was actually smaller than it could have been. There can be no doubt that a considerable amount of  wealth has been destroyed and the market naturally reflects this. In addition, the uncertainty due to the danger of a reactor meltdown at the Fukushima Daiichi plant is probably foremost on everybody's mind right now, including the minds of investors.

 


 

The Nikkei over the past five trading days – inside the rectangle, Friday's and Monday's prices – click for higher resolution.

 


 

The past two trading days in the yen – note the initial spike higher on Friday on repatriation speculation (on this chart a lower number indicates a stronger yen and vice versa as it depicts yen per dollar) followed by a sell-off in Monday's trading after the BoJ's massive liquidity injection – click for higher resolution.

 


 

While economists are probably right that an initial decline of Japan's GDP  will be followed by a rebound as additional government spending kicks in and rebuilding activity gets underway, it would be quite incorrect to believe that this equates to 'no economic loss'. It is merely an artifact of GDP accounting that is at work here. Many observers still tend to fall into the trap of the 'broken window fallacy' whenever a large natural catastrophe occurs. This  fallacy holds that the destruction will result in some sort of economic gain due to the rebuilding effort. This is of course utter nonsense. The resources that will have to be expended in rebuilding all the things that have been destroyed will no longer be available for other purposes, so the bottom line remains a large loss to the economy and the material well-being of Japan's people (as well as people elsewhere that will be deprived of the fruits of a part of Japan's productive capacity), regardless of what the 'GDP data' say.

 


 

A long term chart of Japan's GDP – growth has stagnated for quite some time, but due to a decline in Japan's population, growth of economic output per capita is actually somewhat better than this raw numbers chart implies – click for higher resolution.  

 


 

It appears a US aircraft carrier has passed through a 'radioactive cloud' off the coast of Japan, with 17 navy personnel treated for radiation poisoning – one wonders how 'harmless' the level of radioactivity released so far really is.

Below we reproduce some of the most striking images we have come across that are bringing home the scale of the devastation suffered in Japan's northern coastal region.

 


 

A mass of debris in Kesennuma, Miyagi prefecture

 


 

People walk through the remains of Minamisanriku, carrying relief packets. Most of the town's inhabitants are still missing. 

 


 

A striking image of the moment the tsunami wave was making landfall in Miyako City

 


 

Rikuzentakakata, Iwate Prefecture – walking through mountains of rubble.

 


 

A small car deposited atop a building in Sendai

 


 

A fishing boat turned on its side in Hachinoe, Aomori

 


 

People are patiently queuing for water and food in Sendai

 


 

A convoy of rescue vehicles in the wasteland of Natory City

 


 

A young woman looks forlorn at the destruction in Ishimaki City

 


 

It is truly a disaster of biblical proportions. Our thoughts and best wishes are with the people of Japan in this trying time. Hopefully things won't go from bad to worse – unfortunately this can't be ruled out before the nuclear crisis is resolved.

 

Addendum:

The turmoil in Arab countries has disappeared from the headlines on account of the earthquake in Japan, but there have been a few noteworthy developments:

 

1.   In Libya, the rebels are slowly but surely losing ground against Colonel Qaddafi's better equipped troops. At the same time, the country's oil production has plummeted dramatically, not least due to an out-of-control fire at a major oil facility. Libya's government is now asking Italy for help with putting the fire out (this makes sense, as Italy is the biggest importer of Libya's oil).

 

“Libya's de facto oil minister said Sunday the country's crude production has fallen "drastically" and that he has reached out to Italian oil giant Eni SpA for help in extinguishing a blaze at an eastern oil facility snatched back from rebel fighters.

The call for help by National Oil Co. head Shukri Ghanem demonstrated the country's dependence on foreign oil companies' expertise and the crippling impact of an exodus of that labor force as a result of the fighting in the OPEC member.

"There's quite a big fire in one of our … kerosene storage units (at Ras Lanouf), and we're trying to fight it," Ghanem told The Associated Press in a telephone interview. "We are asking for some help to try to put it down."

"I spoke with Eni's chairman to see if they can help us because it (the refinery) is on the Mediterranean and it affects the environment," he said, adding that he was told "they're deciding whether they can help."

Eni's offices in Milan and Rome were closed Sunday and company spokesmen weren't answering their cell phones.

Forces loyal to Libyan leader Moammar Gadhafi recaptured Ras Lanouf — a key refining and export complex — after fierce battles against the rebels. It is part of a concerted push to reclaim the eastern part of the country where at least four major export ports are located.”

 

If indeed the bulk of Libya's production is off-line, the oil markets will sooner or later take notice again. Even if OPEC tries to make up for the lost production, we ca not imagine this outage to be inconsequential.

 

2.    In Bahrain protests continue to rage. According to a report from the AP, Bahrain has  become home to 'chaos' this Sunday.

 

“Thousands of anti-government demonstrators cut off Bahrain's financial center and drove back police trying to push them from the capital's central square – shaking the tiny island kingdom Sunday with the most disruptive protests since calls for more freedom erupted a month ago. Demonstrators also clashed with security forces and government supporters on the campus of the main university in the Gulf country, the home of the U.S. Navy's Fifth Fleet.

The clashes fueled fears that Bahrain's political crisis could be stumbling toward open sectarian conflict between the ruling minority Sunnis and Shiites, who account for 70 percent of the nation's 525,000 people.

In some neighborhoods, vigilantes set up checkpoints to try to keep outsiders from entering. Bahrain's interior ministry warned Saturday that the "social fabric" of the nation was in peril.

Bahrain's Crown Prince Salman bin Hamad Al Khalifa said the nation has "witnessed tragic events" during a month of unprecedented political unrest. But he warned, "the right to security and safety is above all else.” “Any legitimate claims must not be made at the expense of security and stability," Salman said in a televised speech late Sunday.

A day after visiting U.S. Defense Secretary Robert Gates urged quick progress toward reform, thousands of protesters gathered before dawn to block King Faisal Highway, a four-lane expressway leading to Bahrain's main financial district in downtown Manama, causing huge traffic chaos during morning rush hour and preventing many from reaching their offices on the first day of the work week.”

 

It remains to be seen how effective the revolt in Bahrain will turn out to be, but given the religious overtones of the conflict – a Shi'ite majority is ruled by a Sunni minority – we expect the unrest to continue until significant changes to the country's political system are implemented. The importance of tiny Bahrain to the broader geopolitical situation lies in its proximity to Saudi Arabia, where a Shi'ite minority is likewise battling for its rights. The problem is of course that the Shi'ite minority of Saudi Arabia is located right where the major oil fields are, so there is a latent danger that oil exports could be disrupted if the conflict there escalates.

 

Photo sources: AP, Reuters, WENN, EPA

Charts by: Bloomberg, World Bank


 

 

 

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