Solid Economy Helps Recovery After Kobe Quake

LIGHTS are back on, factories have reopened, and the commuter trains are filling up with workers again in the western Japanese city of Kobe, which was struck by a devastating earthquake Jan. 17.

As Japan sifts through the economic havoc created by the most devastating earthquake to hit the country in 70 years, two lessons are paramount.

A positive lesson demonstrated by the earthquake is the resilience of the closely knit Japanese economic system to weather natural disaster. Economists are virtually unanimous in saying that the damage to manufacturing production from the Kobe quake will be short-lived. By the latter part of 1995, reconstruction efforts are likely to trigger a minor economic boom, they say.

The second lesson is more ominous. The economic damage was manageable in Kobe partly because it is one of Japan's smaller cities. If a similar earthquake had hit Tokyo, the impact would be felt globally.

To be sure, the effects of the Kobe quake spread quickly through Asia, showing how central Japan has become to the region's economy. Factories in Malaysia and South Korea had to close temporarily because of difficulty in getting parts from Kobe.

``Asian economies are very dependent on Japan. With the `just-in-time' [delivery] systems, if supply is cut, factories have to stop activity. This applies to Asia, where the economies have become part of a Japanese manufacturing hierarchy,'' says Richard Werner, chief economist of the Tokyo branch of Jardine Fleming Securities.

The highest damage estimate so far is $400 billion - 10 percent of the Japanese economy. At that level, the reconstruction of Kobe could strain global financial markets. But so far, most other estimates are in the range of $70 billion to $100 billion - a huge, but manageable sum for Japan's $4.l2 trillion economy.

REMARKABLY, a week after the Kobe earthquake - now called the ``Great Hanshin Earthquake'' - the mood seems upbeat.

Even the Tokyo stock and currency markets have lost their jitters. Both the Japanese yen and equities fell sharply in the week following the earthquake. But on Jan. 24, the Nikkei stock-market average rose 275.24 points, to close at 18,060.73. The yen also strengthened slightly against the dollar, as investors responded to clear indications from the Bank of Japan that it would resist any trend toward higher interest rates.

A quake in Tokyo, on the other hand, would be a far different matter. The 1923 earthquake in Tokyo - called the ``Great Kanto Earthquake'' - caused damage equivalent to 46 percent of the economy.

The Tokyo region, including Yokohama to the south and the commuting suburbs to the north and west of Tokyo, today represents 26 percent of the Japanese population, 32 percent of Japan's economic output, and 82 percent of its financial market activity.

The ports of Tokyo and Yokohama together handle about 40 percent of Japan's foreign trade.

Over the past few years, the Japanese Land Agency, Tokyo Metropolitan Government, and Nagoya-based Tokai Bank have made projections of damage estimates should an earthquake strike the capital. In 1989, Tokai Bank forecast the cost of a major earthquake in Tokyo at $800 billion (see chart).

While the Land Agency and the city government failed to estimate the cost of destruction, their damage estimates are extremely large. The conservative Tokyo government report estimated deaths of 9,363 people, 147,000 injured, and 2.4 million refugees. The Land Agency predicted deaths of 150,000 people and 203,000 injuries.

But the example of the Kobe quake has driven home what most people knew already - that the catastrophe of Kobe would be unimaginably worse in Tokyo.

Japanese manufacturers that use the ``just-in-time'' system reduce costs by keeping their inventory low, and depend on split-second response from subcontractors when they get orders. If any part of the system breaks down, it affects the whole.

The Japanese headquarters of companies with Asian customers and subsidiaries have already begun to reorganize to ship parts out of ports other than Kobe, which handles 12 percent of Japanese exports. By Jan. 24, factories were back in production or had worked out strategies to shift operations from Kobe plants.

One of the most badly damaged of the Kobe auto-parts suppliers, Sumitomo Rubber Industries, will shift some of its output from Kobe to factories in Nagoya and Fukushima. Toyota's factories are open again. Some had shut down because they were unable to get supplies from Kobe, which normally handles 20 percent of Toyota's domestic and international shipping.

Most economists are raising their forecasts for Japanese economic growth next year, as Tokyo pumps between $30 billion and $50 billion into the rebuilding of roads, train lines, and public buildings destroyed by the earthquake.

Although the experience of the Northridge earthquake in Los Angeles last year showed that early calculations can badly underestimate the damage, most analysts argue that Tokyo can easily finance the reconstruction of Kobe through a combination of public bonds, loan guarantees, and cash injections from the Japanese central bank.

Hyogo Prefecture, where the earthquake damage was concentrated, has asked the central government for $40 billion in aid to rebuild its infrastructure. Jardine Fleming's Mr. Werner says that the Japanese government could easily raise the money without driving up global interest rates.

Japan's projected public bond issues for 1995 had already topped $100 billion before the earthquake, and another $20 billion to $40 billion will not put undue strain on the global financial system. In addition, reconstruction financing is likely to be spread out over two years.