Nomura Economics Team has analyzed hot the Kumamoto earthquake could affect the macroeconomy in Japan, noting that the greatest concern in the near term is the effect on production activity. Key Quotes "The damage from the earthquake that occurred in Kumamoto and Oita prefectures has been spreading since 14 April. The damage has continued to increase, and although we cannot glean a complete picture at present, we take a look at the impact on macroeconomic activity, including how that impact may occur. Prefectural GDP in Kumamoto and Oita, the prefectures where damage has been greatest, accounted for 1.1% and 0.9%, respectively, of the nationwide total in 2013. Adding in Fukuoka Prefecture (3.6%) gives a share of 5.6% for the three prefectures." "Based on what happened in previous earthquakes, the greatest concern regarding the impact on economic activity in the near term is the effect on production activity caused by disruption to corporate supply chains. In the Great Hanshin Earthquake, which was of a similar size, nationwide production broadly regained its previous level in the month following the earthquake. However, the 18 April edition of the Nikkei said that auto production at Toyota Motor would be dented by around 50,000 vehicles because of problems with parts supply. We think the direct dent to industrial production in 2016 Q2 will be around 0.3%. There are also concerns about semiconductor supply, and the outlook is uncertain at present." "Another important near-term impact, in our view, is the effect on consumer spending from a deterioration in sentiment. It was not possible to clearly identify this negative impact in the cases of the Great Hanshin Earthquake or the Niigata Prefecture Chuetsu Earthquake, although we put to one side the Great East Japan Earthquake, where the nuclear power plant incident had a lasting impact. It may well be that any impact arising from a deterioration in consumer sentiment might not be that great. Turning to spending on travel, spending on tourism in the Kyushu area comes to around ¥580bn a year, and even if the number of travelers fell by 30% for six months, the direct impact would be only ¥87.0bn (0.02% of GDP)." "Damage resulting from previous major earthquakes was in the trillions of yen. On this basis, there could be a similar amount of damage this time around. The government is currently responding using reserves, but that will not be sufficient and we think funds for this purpose are likely to be included in the FY16 supplementary budget the government is looking to pass at an extraordinary Diet session in the fall. We think such spending could reach ¥1trn." For more information, read our latest forex news.