Economic consequences of follow-up disasters: Lessons from the 2011 Great East Japan Earthquake

We apply a Bayesian Panel VAR (BPVAR) and DSGE approach to study the regional effects of the 2011 Great East Japan Earthquake. We disentangle the persistent fall in electricity supply following the Fukushima accident, from the immediate but more temporary production shock attributable to the natural disaster. Specifically, we estimate the contribution of the electricity fall on the regions economic recovery. First, we estimate a BPVAR with regional-level data on industrial production, prices, and trade, to obtain impulse responses of the natural disaster shock. We find that all regions experienced a strong and persistent decline in trade, and long-lasting disruptions on production. Inflationary pressures were strong but short-lived. Second, we present a DSGE model that can capture key observations from this empirical model, and provide theoretical impulse response functions that distinguish the immediate production shock, from the persistent electricity supply shock. Thirdly, in line with the predictions from the theoretical model, counterfactual analysis via conditional forecasts based on our BPVAR reveals that the Japanese regional economies, particularly the hit regions, did experience a loss in production and trade due to the persistent fall in electricity supply.

Automated summary

The study using the Bayesian Panel VAR and DSGE approach found that all regions experienced a strong and persistent decline in trade and long-term production disruptions, with short-lived but strong inflationary pressures during the regional effects of the 2011 Great East Japan Earthquake. Through counterfactual analysis via conditional forecasts, it was revealed that Japanese regional economies, especially the affected regions, suffered production and trade losses due to the persistent fall in electricity supply as predicted by the theoretical model.