The Hope Beneath The Rubble In Japan

One of the oldest aphorisms in Japan is jishin, kaminari, kaji, oyaji, or "earthquakes, thunder, fire, and father"--the things Japanese fear most. That's why, since watching the devastation of last year's earthquake in Los Angeles, Japanese authorities assured citizens that local construction codes would prevent freeways from tumbling and buildings from toppling.

So much for official assurances. Measuring 7.2 on the Richter scale, the quake that hit Japan just before dawn on Jan. 17 was 10 times stronger than L.A.'s, tearing apart expressways and buildings. Its death toll is likely to top the 3,769 dead and missing in Japan's last major quake, in 1948. Kobe, with 1.5 million residents, was hit hardest.

Now, a shocked Japan faces a repair bill estimated at $60 billion--and Standard & Poor's Corp. warns that hidden structural damage could dramatically boost the tab. Meanwhile, the quake may have ripple effects overseas--on companies ranging from insurers to notebook computer makers.

Still, in cold economic terms, the devastation looks manageable. Commerce in the affected areas of Hyogo and Osaka, which account for 12.2% of Japan's gross national product and 16% of retail and wholesale sales, will slow. Even though such companies as Matsushita Electric Industrial Co. say profits may be hurt, reconstruction spending could boost Japan's economy by 1.5% over two years, says J.P. Morgan & Co. economist Jesper Koll.

STATESIDE HELP. New investment in public works nationwide could provide further economic stimulus. Although Japan's quake codes are tougher than those in the U.S., "we have to rethink some of our guidelines and strengthen existing roads, train tracks, and old buildings," says Keiichi Otani of the National Research Institute for Earth Science & Disaster Prevention in Tsukuba.

Can Japan's strapped financial system cope? Markets, at least, are voting yes. The Nikkei stock average dropped just 0.6% in the two days following the jolt. One reason: Japan's Finance Ministry already is considering low-interest reconstruction loans to small companies funded by the nation's $1.9 trillion Postal Savings System. And the Bank of Japan is ready to extend cheap loans to insurers to encourage rapid claims payouts. In the end, S&P figures even Japanese insurers may not have to take much of a hit, because what quake insurance there is in Japan is largely reinsured overseas. Says Robert J. Mebus, managing director of S&P's Insurance Rating Services:

"We think we'll find bits and pieces [of problems] among insurers in the U.S."

Still, many Japanese businesses will suffer. Industries from steel to electronics to beer are already coping with severe damage. At Kirin Brewery Co.'s Kansai facility, for example, the earthquake took out 1.5 million liters of bottled beer worth $8 million and halted production. Some observers are fretting about higher steel prices in Asia since many furnaces are built around Kobe.

Japan's vaunted just-in-time inventory system and export machine also will be fouled up by twisted rails and crumpled highways left by the quake. "The major concern I have is the transportation infrastructure," says Ed Brogan, an analyst at Jardine Fleming Securities Ltd. in Tokyo. Indeed, road damage has cut off exports by Omron Corp., a Kyoto components maker, even though its plants were untouched.

RIPPLE EFFECT? The effects on computer makers could ripple worldwide. Some 20% of the world's liquid-crystal-display production--used mainly in notebook computers--is concentrated in Hyogo and Osaka. Display Technologies Inc., a joint venture between IBM and Toshiba Corp., will lose several days of production at its Kobe area plant, where it makes high-grade thin-film transistor screens. And LCD maker Hosiden Corp. has a plant in the heart of Kobe and a new facility under construction. Even if such plants aren't badly damaged, logistical problems could temporarily halt shipments of LCDs.

Japan already is girding for the Big One many experts think could hit Tokyo one day. Design codes and safety measures probably will get stricter. "Our thinking has been too lax," says Otani. In a nation perhaps more alert to the dangers of earthquakes than any other, that's a telling admission.

Before it's here, it's on the Bloomberg Terminal.