Media  Global Economy  2023.09.28

The concentration of the Japanese economy in certain areas increases its vulnerability to natural disasters

Le Monde on September 8, 2023

This article was initially published in French in Le Monde newspaper on 8. September 2023, as part of a series of monthly columns on Asian economies. The original article can be found here :

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Column by Sébastien Lechevalier, Professor at Ecole des Hautes Etudes en Sciences Sociales (EHESS, Paris) and International Senior Fellow at the Canon Institute for Global Studies (CIGS, Tokyo).

The cost of earthquakes in Japan is ten times higher than the country's share of such events, observes Sébastien Lechevalier in his column.

Column. As in previous years, the summer of 2023 will be marked by major natural disasters, many of them linked to climate change. Admittedly, this is not a new phenomenon, but according to data collected by reinsurer Swiss Re, damage has tripled between 1980 and today, reaching around $275 billion (€255 billion) worldwide in 2022, equivalent to the annual gross domestic product (GDP) of a country like Finland.

The physical and human consequences are no longer merely local; they now represent a global macroeconomic issue. In a globalized economy, risks are becoming increasingly systemic. It's easy to see why central banks have taken up the issue: there are threats not only to price dynamics, but also to financial stability.

Against this backdrop, the Banque de France organized a seminar in Paris on June 27 on the theme of Climate change, natural disasters, and financial risk: How could central banks integrate environmental issues into their policies?, bringing together economists, central bankers and insurers from France, Germany and Japan.

Financial but also productive risks

While the phenomenon is global, not all regions are affected in the same way. Asia is particularly concerned, as the Japanese economist Yasuyuki Sawada has shown: according to the Asian Development Bank, more than a third of the world's natural disasters since the 1960s have occurred on this continent. Today, countries such as the Philippines, India and Indonesia accumulate the highest risks.

The first challenge is to measure the impact of these natural disasters. From this point of view, economists are not always well-equipped, since traditional measures of GDP tend to make destruction a growth-creating factor, linked to reconstruction.

The risks themselves are diverse and linked to the dynamism of the economy: financial, but also productive, which does not work in Asia's favor, as it is central to global value chains: the risk is increasingly high when whole segments of production in a given sector are affected by a local climatic event.


Making our economies more resilient

This was the case in Thailand in 2011, when flooding led to a worldwide shutdown of production for several Japanese automakers. This episode led companies to drastically review their strategy, integrating natural risks into their calculations in addition to production costs. Economic security is not just a geopolitical concept, but also a climatic one.

In this context, how can we improve the resilience of our economies? The case of Japan is interesting, as this country is particularly exposed to natural disasters, including earthquakes. German economist Franz Waldenberger has pointed out that 40% of the damage caused by earthquakes worldwide between 1990 and 2017 was localized in Japan, ten times more than the country's share of the total number of such events.

This certainly reflects the strength of these phenomena in the archipelago, but also the size of the economy and, above all, its concentration in certain areas, which increases its vulnerability. The country is certainly known for having developed technologies (particularly in construction) that can limit damage and reduce loss of life. However, what matters most is, on the one hand, the planning and organization of the territory, and, on the other, the promotion of social capital, defined by the intensity and diversity of links between individuals, to cope with the inevitable. This is a major lesson for our societies' responses to natural disasters.