ISSN 1880-6988

THE JOURNAL OF ECONOMETRIC STUDY
OF NORTHEAST ASIA (JESNA)

Vol. 9 No. 2 August 2014

On Japan’s Growth Potential and the GDP Gap: A Comparison of Shishido andNiwa Estimates with Official Ones
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Soshichi Kinoshita
Prolonged Deflation and Structural Change in the Labor Market in Japan. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sei Kuribayashi

C

o

e
t

Game Theoretical Simulations of the Exchange Rate Policy Using a Global
Macroeconometric Model. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Taiyo Ozaki

n

n

t

s

Paying a Tribute to the Memory of Prof. Lawrence R. Klein (Nobel Prize Laureate
Economist); Honorary Editor-in-Chief of JESNA: Prof. Klein and North-East Asia
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shuntaro Shishido

The Macroeconomic Effectiveness of Resilience Investment in the Context ofEarthquake Risk
. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Takeru Mori
Yusuke Kanda
A Survey of the Arguments Concerning China’s GDP Statistics. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Jie Li

International Centre for the Study of East Asian Development (ICSEAD)

THE JOURNAL OF ECONOMETRIC STUDY OF NORTHEAST ASIA
(JESNA)EDITIONAL COMITTEE
Editors (Board Members)
Takahiro Akita
Soshichi Kinoshita
Reiitsu Kojima
Masaaki Kuboniwa
Shuntaro Shishido*
Tatsuo Hatta(International University of Japan)(Nagoya University)(Daito Bunka University)(Hitotsubashi University)(University of Tsukuba and International Universityof Japan)(International Centre for the Study of East AsianDevelopment)* Chairman of the Board

Co-editors
Kiyoshi Fujikawa
Osamu Nakamura
Sang-woo Nam
Haruki Niwa
Steven Rosefield
Hiroshi Sakamoto
Shinichiro Tabata
Yasushi Toda
Qiyan Wang

(Nagoya University)(International University of Japan)(Asia Development Bank)(Osaka Gakuin University)(University of North Carolina)(International Centre for the Study of East AsianDevelopment)(Hokkaido University)(University of Florida)(Renmin University of China)

THE JOURNAL OF ECONOMETRIC STUDY OF NORTHEAST ASIA is interested
primarily in publishing articles on econometric analysis of the Northeast Asian region(s),or related regions, including various types of modeling, econometric studies, and thedevelopment of a body of data, such as for national accounts, input-output tables, flow-of–funds accounts, and various indices of prices and quantities, etc.
The journal is published in English in principle twice a year.

The International Centre for the Study of East Asian Development, Kitakyushu (ICSEAD)
Address: 11-4 Otemachi, Kokurakita, Kitakyushu, 803-0814, JapanTel:+81-93-583-6202
Fax:+81-93-583-6576
E-mail: jesna@icsead.or.jp

The Journal of Econometric Study of Northeast Asia
Vol. 9 No. 2

August 2014

ContentsPaying a Tribute to the Memory of Prof. Lawrence R. Klein(Nobel Prize Laureate Economist); Honorary Editor-in-Chief of JESNA:
Prof. Klein and North-East Asia............................................................................................ Shuntaro Shishido

Page

1

Game Theoretical Simulations of the Exchange Rate Policy
Using a Global Macroeconometric Model............................................................................................ Taiyo Ozaki

3

On Japan’s Growth Potential and the GDP Gap: A Comparison of Shishido andNiwa Estimates with Official Ones............................................................................................ Soshichi Kinoshita

23

Prolonged Deflation and Structural Change in the Labor Market in Japan............................................................................................ Sei Kuribayashi

33

The Macroeconomic Effectiveness of Resilience Investment in theContext of Earthquake Risk............................................................................................ Takeru Mori
Yusuke Kanda
A Survey of the Arguments Concerning China’s GDP Statistics............................................................................................ Jie Li

41

59

The Journal of Econometric Study of Northeast Asia Vol. 9, No. 2, 201441

The Macroeconomic Effectiveness of Resilience Investment in
the Context of Earthquake Risk
Takeru Mori*, Yusuke Kanda**

Abstract
Many people fear that Japan will continue to experience massive earthquakes, andmany believe that the Japanese economy is experiencing deflation. Public investment isimportant for both reducing and preventing damage from natural disasters. Some view
such investment as a countermeasure that will not only increase the resilience withwhich Japan deals with disasters but also facilitates the nation’s recovery from deflation.
Others have voiced concern that public investment will detract from the economic
efficiency of Japan. Taking into account the probability of earthquake occurrence andextent of damage, this study analyzed the macroeconomic effects of public investment
and examined whether public investment could increase the resiliency and economic
efficiency of Japan.

K EYWORDS : Public investment, Great earthquake, Economic efficiency, Resilience
JEL Classification: H20, H61, H68

1. Introduction
Japan faces the constant risk of major earthquakes, and predictions of these events,
such as the Capital earthquake and Nankai Trough earthquake, have been made. The
Central Disaster Prevention Council estimated as many as 320,000 fatalities from the
Nankai Trough earthquake and as many as 11,000 deaths from the Capital earthquake(Japanese Cabinet Office, 2009). Another model predicted much more damage from the
Capital earthquake, estimating the number of deaths at 150,000 (Nankai Trough Earthquake
Study Measures Working Group, 2012). In a 1988 report, the Central Disaster Prevention
Council estimated the probability of the occurrence of a 7-magnitude great earthquake
within the next 30 years at 70% for a Capital earthquake and at 88% for a Tokai earthquake(Central Disaster Management Council Japan, 1988). Given the increased probability of amajor earthquake, public investment in the country’s infrastructure (e.g., maintenance ofthe transportation system and reinforcement of the seismic design of buildings) has recently
emerged as a very important factor in disaster prevention and mitigation. Thus, a system fordeveloping resilience to minimize the damage from a natural disaster through accurate risk
prediction and the construction of public works is needed. Issues related to economic
growth can also be considered within this framework.
“Resilience” is an important concept when considering the future economic growth ofJapan. Indeed, without a system to enable resilient responses to local and global risk factors,* Graduate School of Engineering, Kyoto University, Japan. E-mail: mori@trans.kuciv.kyoto-u.ac.jp** Graduate School of Engineering, Kyoto University, Japan. E-mail: kanda@trans.kuciv.kyoto-u.ac.jp

42

The Journal of Econometric Study of Northeast Asia

neither governments nor private companies can grow in the context of the current highly
competitive environment. Resilience has emerged repeatedly as an important topic related
to the domestic and global economy.
However, others believe that the notion of resilience is antithetical to economic
rationality and effectiveness. According to this line of thinking, if limited funding is
allocated to the development of resilience in the context of the risk of earthquakes, theresulting uncertainty would decrease the competitiveness of nations and businesses. In
reality, risk is present in all economic situations. Therefore it is possible to manage risk, andrisk is necessary for economic growth.
Although some investment is needed to develop resilience, overinvestment leads to adecrease in competitiveness. Therefore, the level of investment should correspond to therisk of disaster. Great risk will require heavy investment, whereas less serious risk might
permit less investment. Owing to Japan’s high risk for a major earthquake, public investment
is necessary to maintain resilience in the face of this kind of future disaster. Public
investment in resilience may be regarded as “resilience investment.”
In this study, we investigated the appropriate level of resilience investment in thecontext of economic growth targets and the occurrence probability of damage from a major
earthquake. Additionally, we developed models based on the macro-economic simulation
model used for analysis by the Japanese government. Finally, we examined the level ofresilience that would reduce the risk to Japan’s macroeconomy and ascertained the level ofresilience appropriate for the sustainable development of the Japanese economy.

2. Methodology
2.1 Scenario Analysis
To demonstrate the macroeconomic effect of public investment, we employed scenario
analysis to compare the occurrence with the absence of an earthquake. This analysis also
considered macroeconomic simulation models in which an investment in resilience was or
was not made to measure resilience effects.
We estimated the potential effect of two disasters, a Capital earthquake and a Nankai
Trough earthquake. As shown in Table 1, the damage from each disaster was measured interms of a variety of categories and classified under two divisions. “Direct damage” wasmeasured in terms of numbers of dead and injured, disruption of the infrastructure(including homes, roads, railways, the water supply, and sewage systems), and damage toprivate facilities. “Indirect damage” included such factors as decreases in exports and rapid
increases in imports due to the demand for materials and alternative energy. Some of thepredicted values of damage presented in Table 1 were based on the extant literature (marked
with asterisks), whereas other values were estimated in this study. Estimation of indirect
damage requires an appropriate period of observation following a disaster; this period
consists of the time until the affected area returns to a normal level of economic activity.
“Duration of damage” was also considered indirect damage and is presented in Table 2.
The projected magnitude of the major earthquake in these scenarios is presented as“an average value obtained from the trend of past earthquakes,” and the probability ofThe Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

43

Table 1 Estimated Damage from Major Earthquakes
CapitalNankai TroughGreat East Japan

Earthquake

Earthquake

Earthquake

Number of deaths (people)

11,000266,000

19,553

Number of injuries (people)

210,000

334,000

5,943

Destroyed, burned buildings

850,000

1,214,000

128,927

Unemployment (people)

1,070,000 *593,000 *179,254

Social capital stock (trillion yen)

8.99

*

14.2

*

7.24

Housing stock (trillion yen)

35.1*

48.3*

5.20

Private sector stock (trillion yen)

88.2*

35.1*

3.62

Accessibility(Disruptions of transport network)

Metropolitan
ExpresswayAqua line

Tomei
Expressway

Sendai Airport
Access line

Total private consumption

12.6 trillion yen
decrease*

62.3 trillion yen
decrease*

3.6 trillion yen
decrease

Exports of goods and services

12.9% decrease *12.1% decrease *2.7% decrease

Imports of goods and services(Material)(Material)(Material)

Indirect

1.3 trillion yen

1.9 trillion yen

0.2 trillion yen

Damageincrease *increase *increase *(Energy)(Energy)(Energy)

No increase **5.2 trillion yen

5.2 trillion yen

increaseincrease

Index

DirectDamageUtilization rate

17.9% decline*

9.9% decline*

3.0% decline* As estimates have not been published, estimates in this study were based on previous studies (see Expert
Committee for Capital Earthquake, 2005; Nankai Trough Earthquake Study Measures Working Group, 2012,2013; Kansai Institute for Social and Economic Research, 2011; Foundation for Real Estate Information Network
for East Japan, 2012; Japanese Cabinet Office 2005, 2012, and 2013; The Bank of Tokyo-Mitsubishi UFJ, 2011;
Japanese Ministry of Internal Affairs and Communications, Japanese Ministry of Land, Infrastructure andTransport, 2010; Mizuho Research Institute, 2011).
** We assumed that a nuclear power plant would not be located in areas affected by the Great East Japan
Earthquake and hypothesized that alternative energy demands would not occur.
*** Based on data from the Japanese government, private sector capital investment was taken to be proportional
to the rate of operation (Japanese Cabinet Office, 2011).

occurrence is also described as “about 88% within 30 years” (Japanese Cabinet Office,2012). Therefore, although the actual size of an earthquake cannot be determined, ourestimates are probably highly accurate. Our simulations valued damages based primarily
on mean values from Table 1, and we used the probability distribution of occurrence tomeasure stochastic changes in earthquake size. Because the scenarios must also consider
maximal damages, the use of only mean values is not sufficient (i.e., reports estimate
150,000 deaths in the event of a Capital earthquake; mean values lead to estimates of
110,000 deaths). Additionally, the initial occurrence of the two earthquakes (Capital
earthquake and Nankai Trough earthquake) were set to vary according to a probability
density function (see Figure 1) obtained from published occurrence probability figures. The
probability figures were derived from a Poisson process (The Headquarters for Earthquake
Research Promotion, 2010). We identified two scenarios: one based on “A Resilience planfor Japan,” published by the Japanese government, and the other on a government plan to

44

The Journal of Econometric Study of Northeast Asia

invest 200 billion yen over 10 years for a resilience system. We examined the following two
scenarios: (1) an investment of 20 trillion yen per year over a 10-year period and (2) an
investment of half that amount.
In this study, we assumed that damages, both direct and indirect, would be reduced byresilience investment. Improvements in the earthquake-proof infrastructure (e.g., roads,
railways, and buildings) could decrease loss of life, disruptions to the traffic network, andTable 2 Duration of Indirect Damage
Index

Duration

Basis

Exports of

5 years· Data on the period of recovery from the shocks before business activities

goods and services

returned to baseline show a decrease in corporate profits of about 30%
during the 3 years after a supply-chain disruption compared with thegeneral situation.
It is assumed that the disruption will continue for 5 years.

Total private

5 years

consumption· It is assumed that consumer consumption awareness depends on income.
Therefore, total private consumption can be assumed to equal therecovery from a disruption in the supply chain for exported goods andservices.

Imports ofMaterial: 10 years· Imports of goods and services goals for 10 years until the completion ofreconstruction. However, these are initially dependent on external

goods and services
Energy: 3 years

demand and gradually become dependent on domestic procurement.
· In the case of energy dependence, a 3-year period will be needed before
resuming operations; this is based on the case of the Great East Japan
earthquake.

Utilization rate

3 years· The decline in utilization capacity caused by the Great East Japan
Earthquake has not yet been resolved. However, the utilization rate has
been increasing since November 2012, and it will reach a level similar
to that before the earthquake at the end of 2013. This decline inutilization is expected to continue for 3 years.

****: As estimates have not been published, our estimates were based on previous studies (see Hendricks andSinghal, 2005; Japanese Cabinet Office, 2009; Japanese Ministry of Health, Labour and Welfare, 2012).

Figure 1 Probability Density Function for the Initial Occurrence of an Earthquake
Capital Earthquake

Nankai Trough Earthquake

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

Figure 2 Overview of the Macroeconometric Simulation Model

Table 3 Assumed Damages from Great Earthquakes after Resilience Investment
Index

Capital Earthquake

52,000*77000

81,300*Destroyed, burned buildings

325,000

288,900

Unemployment (people)

390,000*

121,000*

Social capital stock (trillion yen)

3.45*

12.5*

*

25.7*

*

18.6*

Number of injuries (people)

DamageIndirect

Earthquake*

Number of deaths (people)

DirectNankai TroughHousing stock (trillion yen)

4,000

13.4

Private sector stock (trillion yen)

6.32

Accessibility

Metropolitan(Disruptions of transport network)

Expressway - Aqua line

Total private consumption

4.5 trillion yen

13.0 trillion yen

decreasedecrease

Exports of goods and services

3.7% decrease

4.6% decrease

Imports of goods and services(Material)(Material)

0.5 trillion yen increase

0.4 trillion yen increase(Energy)(Energy)

No increase

No increase

6.5%

2.0%

DamageUtilization rate

Tomei Expressway

45

46

The Journal of Econometric Study of Northeast Asia

losses of social capital, housing, and the private sector from fires and tsunamis. If direct
damage can be minimized, it may also be possible to decrease indirect damage. We
referenced some predicted values, such as anticipated deaths from a Nankai Troughearthquake under a resilience system, and estimated other values, including direct andindirect damages, by anticipating the conditions that would obtain under a resilienceoriented system. Additionally, we created a hypothetical scenario involving a nuclear power
plant that was severely damaged by a Great East earthquake but that operated continually(Table 3).
2.2 Modeling
We simulated a macroeconomic model to measure resilience and effectiveness under
the aforementioned assumptions. The macroeconomic model used in this study was basedon a model adopted, and later revised, by the Japanese government (Hino et al., 2012) tocompute the effects of improved infrastructure on the nation’s macroeconomy. The model
demonstrates that domestic demand is expanded by resilience investment and thataccessibility is increased by the development of transportation networks. As a consequence,
private consumption is improved and GDP ultimately increases. Conversely, it isdemonstrable that an increased unemployment rate, decreased supply due a reduced
capacity utilization rate, and decreased demand due to reduced temporary private
consumption, results in a reduction in the GDP.
Investment in public works increases inflation by a factor of 1.65 and deflation by afactor of 5.26 (Fujii, 2012). The aforementioned macroeconometric model estimated asimilar effect on inflation and deflation. However, our advanced model accounts for the
inflation/deflation effect from the GDP gap between supply and demand and the differencein the multiplier effect. We measured the effect of resilience investment by focusing onchanges in the GDP, tax revenue, and labor population using the advanced macroeconomic
simulation model. We also considered the impact of resilience investment on Japan’s current
deflationary and inflationary trends; in a hypothetical situation, there is no distinction
between inflation and deflation.
2.3 Estimation Results of Macroeconomic Model
The macroeconomic model proposed in this research is composed of many sub-models.
In this paper, the authors present some of the estimation results for important economic
variables related to macroeconomic simulation. These results are shown in Tables 4, 5, 6, 7,
and 8. First, Table 4 shows potential GDP as a production function. As adjusted R2 is high,the estimated results represent a sufficiently good fit. Second, Table 5 shows private final
consumption expenditures, represented of the consumption function, and this model is alsoa sufficiently good fit. Table 6 presents the estimated results related to the labor force. The
estimated results of models of indirect and current taxes are show in Tables 7 and 8. Tax
revenue was defined as the sum of these taxes. In this study, current taxes included tax
income and wealth, and indirect taxes were based on the SNA data provided by the JapaneseCabinet Office; however, social insurance premiums were not included in this model.

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

47

Table 4 Estimated Parameters of the Potential GDP Modelln(Y) = c(1)+(1.0−c(2)))*ln(KFP*ROU)+c(2)*ln(WT*LF*(1−UR))+c(3)*ln(ACC)
Term

Constant term

KEP*ROU

ACC

Adjusted R²

D.W.

Parametert-value

9.388
2.90

0.686
11.3

1.068
2.97

0.991

0.205

Y: Potential GDP, KFP: Private sector capital stock, ROU: Capacity utilization, WT: Working time,
LF: Labor force, UR: Unemployment rate, ACC: Accessibility.

Table 5 Estimated Parameters of the Private Final Consumption Expenditure Modelln(R_1)=c(1)+c(2)*ln(YDV)+c(3)*ln(GAP1)+c(4)*ln(GAP2)+c(5)*ln(ACC)+c(6)*DR20012007
Term

Constant term

YDV

GAP1

GAP2

ACC

DR20012007

Adjusted R²

D.W.

Parametert-value

16.771( 24.1)

0.456
23.6

0.954
2.45

0.288
4.26

2.532
26.6

0.015
3.32

0.988

1.47

R_1: Private final consumption expenditure, YDV: Disposable income, GAP1: Inflation gap,
GAP2: Deflation gap, ACC: Accessibility, DR20012007: Dummy variable.

Table 6 Estimated Parameters of the Labor Force Model
Ln(LF)=c(1)+c(2)*ln(POP)+c(3)*ln(YWV/POP)+c(4)*DC2004
Term

Constant termPOP

YDW/POP

DC2004

Adjusted R²

D.W.

Parametert-value

2.250
2.05

0.626
5.20

0.213
0.213

0.006
2.20

0.994

0.496

LF: Labor force, POP: Population, YDW: Compensation of employees, DC2004: Dummy variables.

Table 7 Estimated Parameters of the Indirect Tax Model
Dln(ITAXV)=c(1) +c(2)*Dln(N_0)+c(3)*DC2000
Term

Constant term

N_0

DC2000Adjusted R²

D.W.

Parametert-value

0.018
2.64

0.772
5.46

0.026
2.64

0.764

1.463

ITAXV: Indirect tax, N_0: Nominal GDP, DC1999: Dummy variables.

Table 8 Estimated Parameters of Current Taxes Model
Dln(TYPV)=c(1)+c(2)*Dln(N_0)+c(3)*DC1999
Term

Constant term

N_0

DC1999Adjusted R²

D.W.

Parametert-value

0.060
2.62

2.288
5.15

0.069
2.25

0.488

2.101

TYPV: Current taxes, N_0: Nominal GDP, DC1999: Dummy variables.

48

The Journal of Econometric Study of Northeast Asia

3. Analysis
3.1 Investment of 200 trillion yen
As shown in Figure 3, when 200 trillion yen is invested for resilience, there is no GDP
fluctuation over the subsequent 10 years [Case A: no earthquake and no investment].
However, there is a risk of earthquake in a real situation. If an earthquake occurs, the GDP
decreases. As seen in the third case [Case C: average earthquake and no investment], theGDP is reduced greatly after 2014, to 470 trillion yen, because of the possibility that a
Nankai Trough earthquake will occur in 2013 or 2014. The difference between cases A and
C is the expected value of the economic damage caused by the earthquake. This difference
is approximately 60 trillion yen per year, with a cumulative cost of approximately 510
trillion yen after 10 years as shown in Table 9. When calculated per capita, individual
income will have been reduced by approximately 4 million yen over a period of 10 years.
Our analysis also found that approximately 550 trillion yen would be lost per capita, with
GDP increasing to 710 trillion yen. It is estimated that it may require ~23 years for the line
separating cases A and C to be crossed. This would mean a return of the GDP to its originallevel following a cumulative decline of 720 trillion yen and a loss of tax revenue amounting
to approximately 50 trillion yen. Additionally, it is possible that the labor force and theavailable fixed capital would be damaged by the disaster, which may decrease the GDP,
leading to inflation, and thereby partially suppress the multiplier effect. However, in thisstudy, the effects of the disaster on both the demand and the supply sides were calculated
based on data on the economic damage related to the Great East Japan Earthquake, and soon. Thus, the demand and supply GDPs estimated in this paper may not be realistic.
This analysis considered only an average earthquake; the possibility of more serious
damage by a major earthquake should also be considered. Therefore, a simulation with an
occurrence probability of approximately 10% damage, a “worst-case” scenario, was also
computed.
In the fifth case [Case E: massive earthquake and no investment], the GDP will
decline, finally reaching 450 trillion yen. The total reduction in the GDP over 10 years will
equal 740 trillion yen, a 6 million yen loss in income per capita. Tax revenue losses over 10
Figure 3 Estimated GDP (with a resilience investment of 200 trillion yen)

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

49

Table 9 Macroeconomic Effects of Resilience Investment(with a resilience investment of 200 trillion yen)
Case

Disaster

Resilience
investment

Cumulative GDP

Cumulative tax

Workforce afterfor 10 Years

revenue for 10 Years

10 years(trillion yen)(trillion yen)(ten thousand)Case A No

No

5,313.8

677.0

6,404.1

Case B No

200 trillion yen

5,794.4

798.5

6,569.0

Case C Average ScaleNo

4,799.4

611.2

6,341.0

Case D Average Scale

200 trillion yen

5,506.2

729.1

6,510.0

Case E

Huge ScaleNo

4,572.6554.7

6,279.2

Case F

Huge Scale

200 trillion yen

5,374.5

679.8

6,557.6

years will equal 85 trillion yen. Computed values are cumulative over one decade, but when
one considers that the damage will continue for 11 more years, the seriousness of such adisaster for the Japanese economy becomes more apparent.
Predictions indicate that the probability of a major earthquake is very high, lending
credence to predictions of significant Japanese economic losses in the future (i.e., losses ofapproximately 4-6 million yen per person over 10 years).
This study also modeled the extent to which damage could be mitigated through thepromotion of resilience investment. The investment scenario considered involved 20 trillion
yen over a 10-year period. As mentioned above, the GDP loss caused by a major earthquake
would be approximately 60 trillion yen per year in the first case. However, as presented inin Figure 3, the fourth case [Case D: average earthquake and investment of 200 trillionyen], which involved a 200 trillion yen investment in a resilience system, indicated that
economic growth would continue, that the economy would overcome the damage, and that
the GDP would increase by 600 trillion yen over the subsequent 10 years. This suggests that
resilience investment not only minimizes economic damage and fills the gaps associatedwith deflation but also leads to economic growth. Thus, these data show that a resilience
investment of 200 trillion yen would result in economic growth in Japan as well as minimize
the damage caused by a major earthquake. The positive impact was calculated as 710
trillion yen over one decade and as approximately 1,870 trillion yen over 20 years when wecompared cases C and D. Table 11 presents a comparison of the ratio of tax revenues tonominal GDP with and without a resilience investment 10 years earlier. The data reveal a
3.3% improvement in the absence of a resilience investment. Additionally, Table 10
summarizes the multiplier effect of the resilience investment per year. These data indicatethat the maximum value of the multiplier given the risk of an earthquake is 4.25.
Our estimates also indicated that resilience investment would result in an increase intax revenues. Simulation results indicated that increased tax revenues would total 200
trillion yen after 13 years. The positive effects demonstrated by simulation analysis would
require an enormous investment on the part of the Japanese government. However, as thistax analysis shows, a 200 trillion yen financial expenditure could be recouped within 13
years.
The maximum estimated damage resulting from a major earthquake would include
150,000 deaths in the case of a Capital earthquake and 320,000 deaths in the case of a

50

The Journal of Econometric Study of Northeast Asia

Table 10 Multiplier Effect of Investment per Year(with a resilience investment of 200 trillion yen)
No Earthquake
Real
GDP

NominalGDP

Average earthquake

Potential
GDP

Real
GDP

NominalGDP

Potential
GDP

Huge earthquake
Real
GDP

NominalGDP

Potential
GDP

1st year

1.74

1.63

0.26

2.49

2.06

0.98

2.52

2.12

1.77

2nd year

1.92

1.89

0.38

3.40

2.93

1.58

2.95

2.52

1.95

3rd year

2.11

2.19

0.54

3.93

3.46

1.72

3.30

2.87

2.17

4th year

2.30

2.49

0.74

4.18

3.77

1.84

3.96

3.49

2.55

5th year

2.47

2.79

0.94

4.25

3.97

2.03

4.41

3.92

2.94

6th year

2.65

3.09

1.17

4.01

3.87

2.13

4.43

3.95

3.18

7th year

2.83

3.38

1.41

3.90

3.88

2.28

4.76

4.22

3.42

8th year

3.03

3.67

1.67

3.79

3.84

2.43

4.67

4.13

3.67

9th year

3.25

3.97

1.95

3.77

3.85

2.62

4.79

4.20

3.96

10th year

3.49

4.29

2.26

3.69

3.78

2.70

4.71

4.12

4.13

Table 11 Tax Revenue-to-nominal GDP Ratio 10 Years after Resilience Investment(with a resilience investment of 200 trillion yen)
No i nvestment

Investment

14.0%

16.0%

Average earthquake

13.9%

17.2%

Huge earthquake

13.3%

15.6%

No earthquake

Nankai Trough earthquake. Direct and indirect damages would also increase significantly
as the scale of the earthquake increased.
Without resilience investment, we estimate that the GDP would decline by 70 trillion
yen over the 10 years following a maximum-scale earthquake. Additionally, a decline in tax
revenue of approximately 11 trillion yen, along with negative effects on national life andeconomic activity in Japan, would also be expected.
With a resilience investment of 200 trillion yen, the GDP would continue to gradually
increase at a level similar to that estimated for the economic activities following theoccurrence of an average-scale earthquake, even in the case of a maximum earthquake
event. The cumulative 10-year GDP would increase to nearly 800 trillion yen as comparedwith the case where no resilience investment occurred. Additionally, the tax revenue-tonominal GDP ratio would improve, reaching 2.3%, and the multiplier effect of the resilience
investment would increase to 4.79. Additionally, the difference in tax revenues would equal
nearly 120 trillion yen over 10 years, and the 200 trillion yen of resilience investment could
be recovered from the resulting increase in tax revenues after 15 years.
To summarize, a resilience investment of 200 trillion yen over 10 years would
minimize the damage caused by an earthquake, fill the deflationary gap by expanding
domestic demand, and grow the Japanese economy, even in the event of a Capital earthquake
or Nankai Trough earthquake. Thus, an investment of 200 trillion yen can result in bothresilience and efficiency in a deflationary economy.

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

51

3.2 Investment of 100 trillion yen
We next considered the case in which the government invests 100 trillion yen inresilience over a period of 10 years. The scale of the hypothetical earthquake was the sameas in the 200-trillion investment scenario. The simulation results are presented in Figures 4
and 5. When 100 trillion yen is invested for resilience, the trend in the GDP differs
significantly from that in the 200-trillion investment model. The difference in the 10-year
cumulative GDP between the 100-trillion investment cases (Case B and D) and the noinvestment cases (Case A and C) equaled 280 trillion yen. A comparison of the differences
between cases F and B and between cases E and A revealed that the difference in the
cumulative 10-year GDP was ~420 trillion yen as shown in Table 12. The positive impactof a 100-trillion investment is 420 trillion yen in cases of an average earthquake (Case C
and D). However, when 200 trillion yen is spent for resilience, the positive impact on the
GDP was calculated to be 710 trillion yen over a decade. This indicates that an additional
investment of 100 trillion yen makes a significant difference in the scale of the economic
impact.
Figure 4 Estimated GDP (with a resilience investment of 100 trillion yen)

Figure 5 Estimated GDP (with a resilience investment of 200 trillion yen, no deflation)

52

The Journal of Econometric Study of Northeast Asia

Table 12 Macroeconomic Effects of Resilience Investment(with a resilience investment of 100 trillion yen)
Case

Resilience

DisasterInvestment

Cumulative GDP

Cumulative tax

Workforce afterfor 10 Years

revenue for 10 Years

10 years(trillion yen)(trillion yen)(ten thousand)Case ANo

No

5,313.8

677.0

6,404.1

Case BNo

100 trillion yen

5,483.5

717.1

6,449.7

Case C

Average ScaleNo

4,799.4

611.2

6,341.0

Case D

Average Scale

100 trillion yen

5,247.1

655.6

6,404.0

Case E

Huge ScaleNo

4,572.1

554.7

6,279.2

Case F

Huge Scale

100 trillion yen

5,164.5624.5

6,380.1

In each of the three cases (Case B, D and F) that assumed an investment of 100 trillion
yen, there was either no change or a small decline in the GDP trends, according to the scaleof earthquake. This result was notably different from that of the of 200-trillion investment
scenarios, which produced an increasing trend. Under conditions of a massive earthquake,the GDP might decline by 450 trillion yen, which would influence the Japanesemacroeconomy. Additionally, Table 14 summarizes the tax revenue-to-nominal GDP ratio,
which would increase to 0.1%, and Table 13 summarizes the multiplier effect of resilience
investment per year. This result indicates that the maximum value of the multiplier underconditions of the risk of an earthquake would be 5.28.
Table 13 Multiplier Effect of Investment per Year(with a resilience investment of 100 trillion yen)
No earthquake
Real
GDP

NominalGDP

Average earthquake

Potential
GDP

Real
GDP

NominalGDP

Potential
GDP

Huge earthquake
Real
GDP

NominalGDP

Potential
GDP

1st year

1.82

1.70

0.25

3.83

3.13

1.58

4.50

3.66

4.16

2nd year

1.88

1.85

0.35

4.80

3.96

2.31

5.67

4.60

4.22

3rd year

1.89

1.97

0.45

5.38

4.37

2.70

5.85

4.71

4.37

4th year

1.89

2.09

0.55

5.25

4.15

2.94

6.03

4.84

4.63

5th year

1.90

2.19

0.63

5.20

4.21

3.15

6.72

5.39

4.99

6th year

1.90

2.28

0.70

4.63

3.80

3.11

6.83

5.43

5.18

7th year

1.90

2.35

0.76

4.62

3.86

3.25

6.60

5.15

5.44

8th year

1.89

2.41

0.81

4.41

3.72

3.33

6.51

4.99

5.69

9th year

1.88

2.46

0.85

4.14

3.51

3.32

6.51

4.91

5.99

10th year

1.88

2.50

0.88

4.00

3.37

3.27

6.60

4.89

6.15

Table 14 Tax Revenue-to-nominal GDP Ratio 10 Years after Resilience Investment(with a resilience investment of 100 trillion yen)
No i nvestment

Investment

14.0%

14.3%

Average earthquake

13.9%

14.0%

Huge earthquake

13.3%

13.7%

No earthquake

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

53

These results indicate that a resilience investment of 100 trillion yen would not be
sufficient to prevent deflation in the event of a major earthquake. There was no change in
the GDP even in case B; over time, the GDP would decline due to decreases in investment,
especially in 2023, when the resilience investment ended. It would be impossible to cover
the deflationary gap with an investment of 100 trillion yen, but such an investment would
not lead to economic growth. We projected that tax revenues would increase by approximately
40 trillion yen over 10 years; this is lower than the tax revenues in the case of a 200-trillion
investment, but is higher than it would be if no investment were made.
If a major earthquake were to hit the country when it was not emerging fromdeflationary economic conditions, economic activities would be decreased by direct andindirect disaster damage and result in decreased demand and an increase in the deflationary
gap. Ultimately, such a quake would probably lead to a decrease in the GDP.
To summarize, it would be difficult to achieve resilience and efficiency following amajor earthquake with an investment of 100 trillion yen. Simulation results indicated that
this level of investment could negatively influence Japanese financial conditions.
3.3 Investment without Deflation
In the previous section, we considered resilience investment in circumstances ofdeflation and concluded that large-scale public investment could cover the deflationary gap,
resulting in both resilience and efficiency. We also simulated the macroeconomic effect ofresilience investment assuming that Japan was in a situation of inflation without adeflationary gap.
Again, we considered the case of a resilience investment of 200 trillion yen over 10
years (See Figure 5 and Table 15). Were a major earthquake to occur in a situation where
the government has promoted a base scenario corresponding to the third case [Case C:
average earthquake and no investment], the GDP would decline by 40 trillion yen with acumulative cost of 420 trillion yen after 10 years and of 520 trillion yen after 20 years. Thisis a serious result, but it is an acceptable risk when compared with the deflationary model(510 trillion yen after 10 years and 710 trillion yen after 20 years). When compared withcase D (i.e., average earthquake and investment of 100 trillion yen), the positive impact wascalculated as 710 trillion yen over 10 years, and the maximum value of the multiplier of theinvestment would increase to 2.58. However, these effects are smaller than they would bewith deflation (see Table 16).
Conversely, it is possible to reduce risk with resilience investment. Comparisons
between the fourth and second scenarios [Case D: average earthquake and investment of
200 trillion yen and case B: no earthquake and investment of 200 trillion yen] and between
the third and first scenarios [Case C: average earthquake and no investment and case A: noearthquake and no investment] showed approximately 220 trillion yen cumulative over 10
years, and GDP of 21 trillion yen in 2023. This comparison demonstrates the remediationof damages to the macroeconomy when compared with the case in which no resilience
investment is made. Moreover, after 10 years, the GDP would be at a higher level than thecurrent GDP. Even when we considered a maximum damage situation, the GDP would
remain at the current level after 10 years.
However, when the case involving inflation is compared with that involving deflation,

54

The Journal of Econometric Study of Northeast Asia

we can see that the effect of resilience investment is significantly smaller in the former, andthe trend in the GDP also differs greatly between the scenarios. If we promote resilience
investment when there is no deflationary gap, the GDP will increase due to the expansionof domestic demand caused by 10 years of investing, but the GDP will decrease wheninvestment ends. Additionally, as seen in Figure 5, the growth of the GDP would decrease
due to “crowding out.” Private investment is also strong in the inflationary case, where no
deflationary gap exists. In a deflationary environment, large-scale government funding
places financing pressure on the private sector. This negates any economic stimulus effect,
Table 15 Macroeconomic Effects of Resilience Investment(with a resilience investment of 200 trillion yen, no deflation)
Cumulative GDP Cumulative tax
Case

Disaster

Resilience Investment

Workforce afterfor 10 Years

revenue for 10 Years 10 years(trillion yen)(trillion yen)(ten thousand)Case ANo

No

5,658.0

774.3

6,517.6

Case BNo

200 trillion yen

5,918.8

834.3

6,569.1

Case C

Average ScaleNo

5,238.0

696.9

6,470.9

Case D

Average Scale

200 trillion yen

5,721.8

779.2

6,530.6

Case E

Huge ScaleNo

5,130.2

675.4

6,427.4

Case F

Huge Scale

200 trillion yen

5,550.6746.1

6,496.0

Table 16 Multiplier Effect of Investment per Year(with a resilience investment of 200 trillion yen, no deflation)
No Earthquake
Real
GDP

NominalGDP

Average Earthquake

Potential
GDP

Real
GDP

NominalGDP

Potential
GDP

Huge Earthquake
Real
GDP

NominalGDP

Potential
GDP

1st year

1.43

1.36

1.43

1.79

1.51

1.79

1.37

1.09

1.37

2nd year

1.46

1.41

1.46

2.22

1.81

2.22

1.59

1.21

1.59

3rd year

1.46

1.43

1.46

2.58

2.07

2.58

2.02

1.55

2.02

4th year

1.45

1.45

1.45

2.48

1.91

2.48

1.99

1.48

1.99

5th year

1.45

1.47

1.45

2.44

1.86

2.44

1.91

1.40

1.91

6th year

1.45

1.49

1.45

2.49

1.90

2.49

1.84

1.35

1.84

7th year

1.45

1.51

1.45

2.39

1.81

2.39

1.80

1.34

1.80

8th year

1.45

1.53

1.45

2.37

1.80

2.37

1.71

1.29

1.71

9th year

1.44

1.55

1.44

2.35

1.79

2.35

1.70

1.32

1.70

10th year

1.44

1.57

1.44

2.18

1.65

2.18

1.79

1.45

1.79

Table 17 Tax Revenue-to-nominal GDP Ratio 10 Years after Resilience Investment(with a resilience investment of 200 trillion yen, no deflation)
No Investment

Investment

No earthquake

14.9%

15.4%

Average earthquake

14.5%

15.1%

Huge earthquake

14.0%

14.8%

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

55

even when the government makes a huge investment. This was observed only in the
deflationary case; in such a scenario, the earthquake damage is minimized and, at the sametime, grows the Japanese economy. These effects do not exist under inflationary conditions.
The simulation also indicated that tax revenues would also increase due to GDP
growth of 60 trillion yen over 10 years; there is a decline in the GDP after the investment
period ends, with an attendant decrease in tax revenues. Such decreased tax revenues would
make it difficult to recover an investment of 200 trillion yen. The basic trends when an
investment of 100 trillion yen is made under deflationary conditions are similar to thosewhen an investment of 200 trillion yen is made, as shown in Figure 6 and Table 18, 19, 20.
However, as noted at the beginning of this section, economic conditions characterized
by the presence of inflation and the absence of a deflationary gap do not exist in reality. Thisvirtual case was presented to compare the macroeconomic effects of resilience investment
with those of deflation.

Figure 6 Estimated GDP (with a resilience investment of 100 trillion yen, no deflation)

Table 18 Macroeconomic Effects of Resilience Investment(with a resilience investment of 100 trillion yen, no deflation)
Case

Disaster

Resilience
Investment

Cumulative GDP

Cumulative tax

Workforce afterfor 10 Years

revenue for 10 Years

10 years(trillion yen)(trillion yen)(ten thousand)Case ANo

No

5,658.0

774.3

6,517.6

Case BNo

100 trillion yen

5,789.0

834.3

6,569.1

Case C

Average ScaleNo

5,238.0

696.9

6,470.9

Case D

Average Scale

100 trillion yen

5,721.8742.7

6,505.2

Case E

Huge ScaleNo

5,130.2

675.4

6,427.4

Case F

Huge Scale

100 trillion yen

5,419.5

702.0

6,468.7

56

The Journal of Econometric Study of Northeast Asia

Table 19 Multiplier Effect of Investment per Year(with a resilience investment of 100 trillion yen, no deflation)
No earthquake
Real
GDP

NominalGDP

Average earthquake

Potential
GDP

Real
GDP

NominalGDP

Potential
GDP

Huge earthquake
Real
GDP

NominalGDP

Potential
GDP

1st year

1.43

1.37

1.43

1.87

1.38

1.87

2.06

1.56

2.06

2nd year

1.47

1.42

1.47

3.05

2.29

3.05

2.37

1.66

2.37

3rd year

1.46

1.44

1.46

3.53

2.56

3.53

2.49

1.61

2.49

4th year

1.46

1.46

1.46

3.81

2.67

3.81

2.37

1.39

2.37

5th year

1.46

1.48

1.46

3.44

2.25

3.44

2.46

1.43

2.46

6th year

1.46

1.50

1.46

3.48

2.23

3.48

2.24

1.24

2.24

7th year

1.46

1.53

1.46

3.42

2.16

3.42

2.14

1.17

2.14

8th year

1.45

1.55

1.45

3.29

2.05

3.29

2.18

1.25

2.18

9th year

1.45

1.57

1.45

3.28

2.07

3.28

2.24

1.36

2.24

10th year

1.45

1.59

1.45

2.91

1.76

2.91

2.36

1.53

2.36

Table 20 Tax Revenue-to-nominal GDP Ratio 10 Years after resilience investment(with a resilience investment of 100 trillion yen, no deflation)
No Investment

Investment

No Earthquake

14.9%

12.8%

Average Earthquake

14.5%

14.7%

Huge Earthquake

12.4%

12.2%

4. Conclusion
In this study, we theoretically and quantitatively examined the conditions that would
lead to economic resilience, efficiency, and economic growth in the event of a futuredisaster. Using an advanced macroeconomic simulation model, we analyzed the effects ofresilience investments of 200 trillion and 100 trillion yen, simulating the conditions of aCapital earthquake and a Nankai Trough earthquake. Four main findings were obtained
from this study.
First, using predictions published in a Japanese government report, we calculated that
the GDP would probably decrease to 60 trillion yen as a result of either a Capital earthquake
or Nankai Trough earthquake event. The 10-year cumulative value would decrease sharply
to 510 trillion yen. Notably, this estimated loss is a stochastic average value expected froma variety of situations including both the occurrence and the absence of an earthquake.
These results strongly indicate the need for preparation that views a future earthquake eventas the default condition.
Appropriate resilience investment related to the occurrence of an earthquake canminimize damage and also facilitate an escape from deflationary conditions. Economic
growth can also be maintained in spite of a major earthquake event. An investment of 200
trillion yen for 10 years, will reduce damage to the macroeconomy and also act as aneffective economic stimulus. Our study estimated that this level of investment would
contribute 600 trillion yen to the GDP by 2025. However, the third finding of this study was

The Macroeconomic Effectiveness of Resilience Investment in the Context of Earthquake Risk

57

that an investment of 100 trillion yen would be insufficient to fill the deflationary gap
caused by a disaster and would have only a minor economic stimulus effect.
We also considered a hypothetical situation where no deflationary gap exists.
Simulations demonstrated that resilience in the context of disaster could be achieved
through investment, but that the economic stimulus effect would be limited by “crowding
out.” However, an investment of 100 trillion yen over a 10-year period could substantiallymitigate damage to the GDP. It is important to note that although the model parameters
were estimated based on real data, the numerical results described above were calculated
based on specific assumptions. Therefore, further study is needed to verify whether therequired level of investment depends on the extent of damage to the GDP.
By modifying the scale of investment to fill the deflationary gap, it is possible not only
to build a resilience system but also to maximize efficiency in the service of economic
growth.
Based on the scenarios described above, we conclude that assertions that “economic
efficiency (rationality) and resilience conflict with each other and that there is a trade-off is
between these two” are not valid under conditions of deflation and in situations involving ahigh risk of an earthquake. In these situations, sufficient resilience investment can lead toefficient economic growth and the development of a system that protects the economy
against the impact of earthquakes. As a result of Japan’s deflationary economic environment
and the probability of a major disaster, the nation faces significant economic risk. Therefore,a policy of public investment for economic growth and resilience is strongly indicated.
Future work is needed to test and elaborate on the presuppositions of this study.
Additional work is also needed to determine the most effective levels of investment invarious regions. This study demonstrates that resilience investment can contribute tobuilding a robust national economy capable of withstanding risk and emerging fromdeflation.

Acknowledgements
We are grateful for the advice of Prof. Satoshi Fujii of Kyoto University. We also wish to
thank Seiichi Hino of The Institute of Behavioral Science, for advice during the analysis
phase.
References
Expert Committee for Capital Earthquake (2005), Damage Estimation, Japanese Central Disaster
Prevention Council
Fujii, S. (2012), “Business Benefit Analysis of Public Works by the Central Government in Deflation,”
Infrastructure Planning Research Proceedings, 46
Hino, S., T. Momma, A. Koike, T. Nakano and S. Fujii (2012), “Keynesian Analysis of the Public
Investment Effect Under Conditions of Endogenous Inflation-Deflation,” Journal of JSCE, F4, vol.
68, No. 4, pp. I_21-I_32.
Hendricks and Singhal (2005), “The Effect of Supply Chain Disruptions on Long-Term Shareholder
Value Profitability, and Share Price Volatility,” Supply Chain Magazine.
Japanese Cabinet Office (2009), A Study on the Reconstruction Measures for the Big Earthquake
Japanese Cabinet Office (2011), Enhance the Power Essential for the Japanese Economy−2011 Annual

58

The Journal of Econometric Study of Northeast Asia

Economic and Fiscal Report (economic and fiscal policy minister report).
Japanese Cabinet Office (2012), The Private Sector Capital Stock Bulletin.
Japanese Ministry of Health, Labor and Welfare (2012), An Analysis of the Labor Economy.
Japanese Ministry of Internal Affairs and Communications (2012), Family Income and Expenditure
Survey (household income and expenditure Edition).
Japanese Ministry of Land, Infrastructure and Transport (2010), Study of National Cargo Net (Logistics
Census).
Kansai Institute for Social and Economic Research (2011), Prediction of Stock Damage Costs of the Great
East Japan Earthquake.
Material from a meeting of the Japanese Central Disaster Management Council (1988), Japanese Central
Disaster Management Council.
Mizuho Research Institute (2011), Interpreting the Trade Balance after the Great Earthquake: Is Trade the
Deficit Transient? −[This reference is missing information.]
Mori, T., and Kanda, Y. (2013), “Analysis of the Macroeconomic Effectiveness of Resilient Investment
Related to the Risk of the Great Earthquake,” Proceedings of Infrastructure Planning, JSCE, Vol.
47, CD-ROM.
Nankai Trough Earthquake Study Measures Working Group (2012), About the Estimated Damage of a
Nankai Trough Earthquake (1st report), Japanese Central Disaster Prevention Council.
Nankai Trough Earthquake Study Measures Working Group (2013), About the Estimated Damage of a
Nankai Trough Earthquake (2nd report), Japanese Central Disaster Prevention Council.
The Bank of Tokyo-Mitsubishi UFJ (2011), Part 2−the Economic Impact of the Great East Japan
Earthquake: Analysis from the Demand Side.
The Foundation for Real Estate Information Network for East Japan, (2012), Trends in the Tokyo
Metropolitan Area Real Estate Market.
The Headquarters for Earthquake Research Promotion (2012), “National Seismic Hazard Maps in 2010,”
Guide and Commentary, p. 25.

SUBMISSION GUIDELINESSUBMISSION
The manuscript should be submitted as electronic files to jesna@icsead.or.jp. Authors areencouraged to email the Editors at the same address should they have additional questions about
the submission process.
The International Centre for the Study of East Asian Development, Kitakyushu
11-4 Otemachi, Kokurakita, Kitakyushu, 803-0814, Japan
Tel : +81-93-583-6202
E-mail : jesna@icsead.or.jp
OVERALL STYLE
The manuscript must be typed and double-spaced, on one side of 81/2 ×11-inch or
A4 metric paper size, and the total length should not exceed 50 pages.
The manuscript should be saved as either:a) a Microsoft Word fileb) an MS-DOS text file
The first page should include: Title, Author(s) Name(s), Abstract (not more than
150 words), Keywords and JEL classification (not more than seven items).
Affiliation should appear as an asterisked footnote (*) on the first page of the text,
with a superscript asterisk before the author’s name.
Appendices, if any, should appear at the end of the paper, before any References.
Figures should be originals on 81/2 ×11-inch or A4 metric paper size with large
enough letting to permit photographic reproduction.
Tables and Figures should be on separate sheets and numbered using Arabic
numerals. The position of Table and Figures should be indicated in the manuscript.
Footnotes should be numbered consecutively, and be double-spaced. They may
appear at the bottom of each page of the text. Acknowledgements, if any, should
be made in Footnote 1, with a superscript “1” at the end of the Title.
References should be listed alphabetically at the end of the paper on the following
standard format:
Book:
Author(s) (year), Title, Page Number(s), Publisher, City of
Publication
Published Article: Author(s) (year), “Title”, Journal, Volume Number, Page
Number(s), Publisher, City of Publication
Unpublished Articles: Author(s) (year), “Title”, Type of Paper, Page Number(s),University or Foundation
GENERAL AGREEMENT
The copyright to accepted papers belongs to the International Centre for the Study of East
Asian Development, Kitakyushu.