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Japan: The Economic Consequences of Disaster

The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.

NEW YORK ( TheStreet) -- The toll in human misery wrought by the tsunami and earthquakes in Japan tests the imagination of economists, but the effects on Japan's GDP and wealth are a different matter.

GDP, which measures goods and services produced, will immediately dive in Japan and stay lower through the second and into the third quarters of 2011, but will then surge as construction and spending on capital equipment to rebuild drives up growth.

Overall, however, Japan will be poorer, for this disaster. Lost infrastructure, factories and the like will be replaced but wealth is the sum of what citizens and governments own -- those include physical assets like those just noted and financial wealth, namely securities and cash. Rebuilding will run down Japan's financial wealth to replace lost physical assets.

As estimates of the damage emerge, those totals are real deadweight losses to wealth. To the extent Japan must run down financial assets and bring home foreign investment to rebuild, the net wealth of Japan is permanently reduced.

Generally, after three years or so, the impact on GDP is small -- production is lost in the first two quarters but more goods and services are produced in later quarters to rebuild. Often the net loss in GDP, from even the largest natural disasters, comes to no more than one percent of GDP in large advanced industrialized countries.

Replacing lost production and rebuilding lifts output in a nation's geographic areas less affected by the disaster to provide the resources to rebuild and compensate for lost output in the most affected region.

However, this time could be different. Japan has encountered two disasters -- the tsunami and earthquake, and the nuclear explosions -- and globalization may make Japan more vulnerable rather than in the past.

The double whammy has the potential to keep the Japanese economy shut down longer and globalization offers Japan's export customers alternatives they might not have enjoyed a decade or two ago. Hyundai and Ford (F) now are good substitutes for Toyota's (TM) cars, and even more so, Caterpillar (CAT) tractors made in China can replace Komatsu's land movers.
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