The Japanese Black Swan: Economic and Social Impacts Even Larger Than They Seem?

The widening ripples of the earthquake's aftermath confounds experts. The inextricable interconnectedness of the global economy - and of the societies that depend on it - continues to be shown in high relief. The implications are not yet clear; is this really an economic catastrophe? Or are frightened officials and investors succumbing to panic?

Reports this morning suggest that Japan's auto and electronics industries are shutting down due to power outages, transportation problems and financial concerns. Other sources suggest that the overall cost of the earthquake-related damage can not be borne alone by the Japanese insurance industry (the Japanese do not take out as much personal insurance as some other developed societies so their invested base is smaller). This means that global reinsurers in the UK, Switzerland and the US may suffer losses. Supply chain problems identified in yesterday's post in this space will also be an issue as Japan is the primary global supplier of various types of electronic components. Finally, Japan derives 30% of its energy from nuclear plants. The loss of the Fukushima plants will put additional pressure on oil and other commodity prices.

In the following article, the Automatic Earth blog assesses the impact (thanks to Barry Ritholtz for the tip):


"The Japanese earthquake is a tragedy of epic proportions in so many ways. The situation continues to evolve, and the full scope of the disaster will not be understood for a long time.

One critical aspect is the effect on Japan's nuclear industry, which provides over 30% of the country's electricity from 54 reactors. Some of the largest nuclear plants in the world (Fukushima Dai-ichi and Fukushima Dai-ni, 4696 MW and 4400 MW, respectively) are located close to the epicentre, and on the coast, directly in the path of the resulting tsunami:

A state of emergency has been declared for five reactors, with the worst affected reactors being the forty year old Boiling Water Reactors (BWRs) at Fukushima Dai-ichi, 240 km north of Tokyo. These reactors shut down, as the control rods were automatically inserted to dampen the nuclear reaction (SCRAM). At least two reactors experienced a station blackout, which prevented the cooling system from functioning (a loss of coolant, or LOCA accident).

Without the ability to cool the core, the risk is a meltdown, with the potential for explosions resulting from steam or hydrogen. Even after the cessation of a nuclear chain reaction, heat from radioactive decay continues to be produced, and this heat needs to be dispersed in order to avoid a meltdown of the components of the core. Workers have been desperately trying to cool the reactor cores at units 1 and 3, but there has already been an explosion at Fukushima 1. Footage of the plant shows only the skeleton of the building remains. An evacuation zone has been expanded from 10km to 20km, and close to 200.000 people have been evacuated from the area.

Reactors are equipped with multiple cooling systems as part of the defence in depth design principle. The idea is that there should be redundant systems with no components in common, and therefore (theoretically) no possibility for common mode failures. Each system should be capable of independently preventing a design-basis accident.

Japan is a sophisticated country with a long history of nuclear power, and also a long history of seismic activity. One could argue that this is Japan's Hurricane Katrina moment, in that a predictable scenario was not adequately prepared for in advance despite the potential for very severe consequences.

The design-basis accident for Fukushima did not include earthquakes of the magnitude of this event (recently upgraded to 9.0 on the Richter scale).

Company documents show that Tokyo Electric tested the Fukushima plant to withstand a maximum seismic jolt lower than Friday's 8.9 earthquake. Tepco's last safety test of nuclear power plant Number 1—one that is currently in danger of meltdown—was done at a seismic magnitude the company considered the highest possible, but in fact turned out to be lower than Friday's quake. The information comes from the company's "Fukushima No. 1 and No. 2 Updated Safety Measures" documents written in Japanese in 2010 and 2009.

The documents were reviewed by Dow Jones. The company said in the documents that 7.9 was the highest magnitude for which they tested the safety for their No. 1 and No. 2 nuclear power plants in Fukushima. Simultaneous seismic activity along the three tectonic plates in the sea east of the plants—the epicenter of Friday's quake—wouldn't surpass 7.9, according to the company's presentation. The company based its models partly on previous seismic activity in the area, including a 7.0 earthquake in May 1938 and two simultaneous earthquakes of 7.3 and 7.5 on November 5 of the same year.

The Fukushima 1 plant was equipped with 13 diesel back-up generators to power the Emergency Core Cooling System (ECCS), but all of these failed. Battery back-ups are available, but these function only for a few hours. Without the ability to cool the reactor, the outcome is a meltdown, which can occur rapidly after the failure of cooling.

Top government officials assured the nation that an explosion that took place Saturday at one of the reactors at the Fukushima Daiichi plant merely knocked down the walls of its external concrete building, and that the reactor and the containment structure surrounding it remained intact.


If hydrogen were allowed to build up within the containment, it could lead to a deflagration event. The numerous catalytic hydrogen recombiners located within the reactor core and containment will prevent this from occurring; however, prior to the installation of these recombiners in the 1980s, the Three Mile Island containment (in 1979) suffered a massive hydrogen explosion event in the accident there.

The containment withstood this event and no radioactivity was released by the hydrogen explosion, clearly demonstrating the level of punishment that containments can take, and validating the industry's approach of defence in depth against all contingencies. Some, however, do not accept the Three Mile Island incident as sufficient proof that a hydrogen deflagration event will not result in containment breach.

Given the detection of radioactive caesium, which could only have come from inside exposed fuel rods beginning to burn, and the subsequent violent explosion, it is difficult to imagine scenarios not involving substantial destruction of the reactor. Indeed it has been admitted that a major accident has occurred in one unit and another is at risk:

Meltdowns may have occurred in two reactors: Japan government

Japan's top government spokesman Yukio Edano said Sunday that radioactive meltdowns may have occurred in two reactors of the quake-hit Fukushima nuclear plant. Asked in a press conference whether meltdowns had occurred, Edano said "we are acting on the assumption that there is a high possibility that one has occurred" in the plant's number-one reactor. "As for the number-three reactor, we are acting on the assumption that it is possible," he said.

There are 6 reactors at Fukushima 1 and an additional 4 at nearby Fukushima 2. Tokyo Electric (TEPCO) is now indicating that there are cooling problems and dangerous pressure increases at several of these units:

Tokyo Electric said Saturday another nuclear-power plant nearby, Fukushima Dai-ni, was experiencing rises of pressure inside its four reactors. A state of emergency was called and precautionary evacuations ordered. The government has ordered the utility to release "potentially radioactive vapor" from the reactors, but hasn't confirmed any elevated radiation around the plant.

Loss of cooling ability appears to be the common problem:

Tokyo Electric Power Co. (TEPCO), operator and owner of Fukushima nuclear plants, said early on Sunday that a sixth reactor at the nuclear power plants has lost its ability to cool the reactor core since Friday's quake. The No. 3 reactor at Fukushima No. 1 nuclear power plant lost the cooling function after No. 1 and No. 2 reactors at the No. 1 plant and No. 1, No. 2 and No. 4 at the No. 2 plant had suffered the same trouble.

And:

Kodama said the cooling system had failed at three of the four such units of the Daini plant [Fukushima 2]. Temperatures of the coolant water in that plant's reactors soared to above 100 degrees Celsius (212 degrees Fahrenheit), Japan's Kyodo News Agency reported, an indication that the cooling system wasn't working.

Containment structures are being flooded with seawater and boric acid as a desperation move to lower the temperature and poison any capacity for further nuclear reactivity. The latter is important to absorb neutrons in order to avoid incidences of potential criticality during a meltdown. Such an event would have the potential to cause much more widespread releases of radiation.

There seems to be considerable evidence that we are closer to the beginning of this disaster than to the end, and already it is almost unprecedented in scope.

"If this accident stops right now it will already be one of the three worst accidents we have ever had at a nuclear power plant in the history of nuclear power," said Joseph Cirincione, an expert on nuclear materials and president of the U.S.-based Ploughshares Fund, a firm involved in security and peace funding.

Comparisons are being made with the accident at Chernobyl, but there are a number of very important differences, notably in terms of reactor design, and therefore accident implications. Nuclear safety in the former Soviet Union was once my research field (see Nuclear Safety and International Governance: Russia and Eastern Europe), and the specifics of the accident at Chernobyl could not be replicated in Japan. The risk in Japan is primarily meltdown, not a Chernobyl-style run-away nuclear reaction.

Like the Fukushima incident, Chernobyl began with a loss of power, undertaken in that case as a test of safety systems commissioned long after the reactor became operational (the Chernobyl reactor had been in a state of critical vulnerability to blackout for two years at the time of the accident.) It could have been worse, however. Attempts to extinguish the fire at Chernobyl 4 came very close to causing a loss of power to the other three reactors at the site, which could easily have sent four reactors into into a critical state rather than one.

Non-technical comparisons between Fukushima and Chernobyl are more apt, specifically in terms of governance in the nuclear industry and complacency as to risk. Nuclear insiders in many jurisdictions are notorious for being an unaccountable power unto themselves, and failing to release critical information publicly.

The Soviet nuclear bureaucracy ignored obvious risks and concealed accidents wherever possible. While nothing remotely like so serious has occurred previously in Japan, Fukushima 1 has been at the centre of transparency problems in the Japanese nuclear industry before. In 2002, the president and four executives of Tokyo Electric Power Corporation (TEPCO) were forced to resign over the falsification of repair records.

Japan's nuclear power operator has chequered past

The company was suspected of 29 cases involving falsified repair records at nuclear reactors. It had to stop operations at five reactors, including the two damaged in the latest tremor, for safety inspections. A few years later it ran into trouble again over accusations of falsifying data.

In late 2006, the government ordered TEPCO to check past data after it reported that it had found falsification of coolant water temperatures at its Fukushima Daiichi plant in 1985 and 1988, and that the tweaked data was used in mandatory inspections at the plant, which were completed in October 2005.

In addition, the Japanese government had been repeatedly warned about seismic risks:

[..] the real embarrassment for the Japanese government is not so much the nature of the accident but the fact it was warned long ago about the risks it faced in building nuclear plants in areas of intense seismic activity. Several years ago, the seismologist Ishibashi Katsuhiko stated, specifically, that such an accident was highly likely to occur. Nuclear power plants in Japan have a "fundamental vulnerability" to major earthquakes, Katsuhiko said in 2007. The government, the power industry and the academic community had seriously underestimated the potential risks posed by major quakes.

Katsuhiko, who is professor of urban safety at Kobe University, has highlighted three incidents at reactors between 2005 and 2007. Atomic plants at Onagawa, Shika and Kashiwazaki-Kariwa were all struck by earthquakes that triggered tremors stronger than those to which the reactor had been designed to survive.

The trouble is, says Katsuhiko, that Japan began building up its atomic energy system 40 years ago, when seismic activity in the country was comparatively low. This affected the designs of plants which were not built to robust enough standards, the seismologist argues.

Many countries are currently looking to nuclear power to carry the load as energy production from conventional fossil fuels declines. Japan has previously unveiled very ambitious plans to expand nuclear capacity:

The Japan Atomic Energy Agency has modelled a 54 percent reduction in CO2 emissions from 2000 levels by 2050, leading on to a 90 percent reduction by 2100. This would lead to nuclear energy contributing about 60 percent of primary energy in 2100 (compared with 10 percent now), 10 percent from renewables (now 5 percent) and 30 percent fossil fuels (now 85 percent).

Proponents argue that the energy returned on energy invested (EROEI) for nuclear power is sufficient to power our societies, that nuclear power can be scaled up quickly enough as fossil fuel supplies decline, that there will be sufficient uranium reserves for a massive expansion of capacity, that nuclear is the only option for reducing carbon dioxide emissions, and that nuclear power can be operated with no safety concerns through probabilistic safety assessment (PSA).

I disagree with all these assertions. Looking at the full life-cycle energy inputs for nuclear power, it seems to be barely above the minimum EROEI for maintaining society, and the costs (in both money and energy terms) are front-loaded.

Scaling up nuclear capacity takes extrordinary amounts of both money and time. While construction can be speeded up, where this has been done (as it was in Russia), the deleterious effect on construction standards was significant. Uranium reserves, especially the high-grade ores, are depleting rapidly. The reduction in carbon dioxide emissions over the full life-cycle do not impress me. In addition, nuclear authorities make risk decisions without informing the public. They have consistently made risk calculations that have grossly underestimated the potential for accidents of the kind that can have generational impacts.

In my view, nuclear power represents an unjustified faith in the power of human societies to control extremely complex technologies over the very long term. Any activity requiring a great deal of complex and cooperative control will do badly in difficult economic times.

Also, no human society has ever lasted for as long as nuclear waste must be looked after. It needs to be held in pools on site for perhaps a hundred years in order to cool down enough for permanent disposal, assuming a form of permanent disposal could be conceived of, approved and developed. During this period, the knowledge as to how this must be done will need to be maintained, and this may be more difficult than is currently supposed.

We need to evaluate the potential for a nuclear future in light of the disaster in Japan. This was not unpredictable, and should have been accounted for in any realistic assessment of nuclear potential. It cannot realistically be described as a black swan event.

Japan has few energy alternatives, as it lacks indigenous energy reserves and must import 80% of its energy requirements. It was therefore prepared to make Faustian bargains despite what should have been obvious risks. The impact of the loss of so much capacity, much of it probably permanently, on available electric power following the accident is very likely to impede Japan's ability to recover from this disaster, potentially strengthening the parallels with America's Hurricane Katrina.

We need to assess the risks inherent in using nuclear power in other locations, whether or not the risk they face is seismic (see Metsamor in Armenia, for instance, or Diablo Canyon in California). There are risks in many areas, most of which are grounded in human behaviour, either at the design stage or the operational phase. Human behaviour can easily turn what should be a one in one hundred thousand reactor-year event in to something all too likely within a human lifespan. Nuclear power may allow us to cushion the coming decline in fossil fuel availability, but only at a potentially very high price.

In a related article from the Telegraph, the additional economic impacts are discussed:

Japan's giant car industry has announced a major shutdown as fears grow over the economic impact of Friday’s devastating earthquake and subsequent tsunami which has crippled much of the north-east of the country.

The three largest motor manufacturers – Toyota, Honda and Nissan – said they would stop production at almost all of their domestic assembly plants. The safety of the workforce and deaths were cited as reasons behind the decision. The electronics giant Sony also said it would be shutting down production. Gerard Lyons, chief economist at Standard Chartered, warned of possible temporary price stagflation and an initial downward move for the country’s economy. "The timing of the disaster could not have been much worse," admitted analysts at Capital Economics, pointing to Japan’s economic contraction in the last three months of 2010.

The disaster forced the Bank of Japan (BoJ) to issue a statement, as it draws up plans for an emergency "quake budget". The BoJ said: "The bank will continue to do its utmost, including the provision of liquidity, to ensure stability in financial markets and to secure the smooth settlement of funds, in the coming week." Naoto Kan, the Japanese prime minister, asked BoJ to "save the country" after politicians from both sides of the political spectrum agreed on the need for the budget to introduce emergency spending to fund rescue and clean-up efforts and to resuscitate the economy.

Economists warned that the closures staged by the motor and electronics companies could be the tip of the iceberg, with other parts of industry likely to feel knock-on effects in the coming days. "Temporary closures of factories and oil refineries and the shutting down of power stations are likely to affect output throughout the country," said Wolfgang Leim of Commerzbank. "Economic output may therefore shrink again slightly in the first quarter."

Between them the three car companies closed 22 assembly plants, while Sony halted production at six of its domestic plants, including a Blu-ray factory where more than 1,000 workers were stranded yesterday. The closures are likely to damage Japan’s exports in the coming months, driving down economic growth yet further. "It is tough to know the extent of the damage and, therefore, also the cost," said Jim O’Neill, chairman of Goldman Sachs Asset Management. "Most of Japan’s recovery is driven by exports so the key is to make sure the yen doesn’t strengthen ."

Mr Lyons pointed out that after the Kobe earthquake in 1995 – which was in an economically more important region – the economy followed a V-shape performance curve, with an initial surge downward but with a strong rebound as policy stimulus and private spending returned.

Meanwhile, insurance analysts estimated that the earthquake could cost the global industry up to $10bn (£6.2bn). Although the Japanese insurance market is large, the amount of businesses and households that take out insurance cover is smaller than in Western markets, according to Risk Management Solutions. Most of the insured losses will be absorbed by global reinsurers such as Munich Re and Swiss Re, although companies operating in the Lloyd’s of London market will also suffer.