Japan's recent earthquake and tsunami would cause up to 235 billion U.S. dollars in damage and a temporary impact on the economic growth of Japan and the region, but the growth will pick up after mid-2011 as reconstruction efforts get underway, the World Bank said in a report on Monday.

Damage up to US$235 billion

The economic damage caused by the catastrophe will be between 122 billion to 235 billion U.S. dollars, or about 2.5 percent to 4 percent of Japan's gross domestic product, the bank said in its report The Recent Earthquake and Tsunami in Japan: Implications for East Asia.

The report is part of the bank's latest East Asia and Pacific Economic Update.

"While it is too early to estimate accurately, the cost of the damage is likely to be greater than the damage caused by the 6.9 magnitude Kobe earthquake in 1995," it said.

The Kobe earthquake that hit the city in central Japan in 1995 caused a damage of about 100 billion U.S. dollars, or 2 percent of the GDP.

The World Bank said the substantial part of the costs of the damage will be borne by the households and the Japanese government, which has earmarked 12 billion U.S. dollars from the current budget, with much more expected to follow in 2011. The private insurance sector will bear 14 billion to 33 billion U.S. dollars of losses from the magnitude 9.0 earthquake and the consequent tsunami, according to industry estimates.

Reconstruction up to 5 years

The World Bank said reconstruction is likely to take up to five years and Japan's past experience suggests an accelerated reconstruction effort.

"If history is any guide, real GDP growth will be negatively affected through mid-2011. Growth should pick up in subsequent quarters as reconstruction efforts, which could last five years, accelerate. The intensity of these efforts is likely to impact on the final cost of the disaster," it said.

Just like measures taken following the Kobe earthquake, the Bank of Japan has announced large injections of liquidity, and the Japanese yen has been strengthening following the unwinding of the carry trade and expected repatriation of funds for reconstruction.

Impact on east Asia

The bank said the impact will be felt in East Asia, especially through trade and finance channels.

"Clearly given Japan's importance in East Asia, the tragic events unfolding will be felt in the region," said Vikram Nehru, World Bank Chief Economist for East Asia and Pacific.

"At this stage, we expect the economic impact of this disaster on the East Asian region to be fairly short-lived. In the immediate future the biggest impact will be in terms of trade and finance," he said.

Japan's trade slowed only for a few quarters after the Kobe earthquake in 1995. Imports had recovered fully within a year, while exports rebounded to 85 percent of the pre-quake levels, it said, adding that disruption to production networks, especially in automotive and electronics industries, could continue to pose problems this time around.

The impact of the earthquake and tsunami will also be felt in East Asia through the finance channel, given that about one-fourth of the region's long-term debt is denominated in yen. A one percent appreciation in the yen would translate into about a 250 million U.S. dollars increase in annual debt servicing on yen- denominated assets held by developing nations in the region.

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