LONDON, March 11, 2011 (AFP) - The deadly earthquake in Japan will increase the chances of a fiscal crisis in the world's third largest economy, British consultancy Capital Economics warned in a report published here on Friday.
"It may be several days before the costs of the disaster are clearer. The greater the social and economic damage, the larger the threat to the government's ability and willingness to ward off a fiscal crisis," read the study, written by economists Julian Jessop and David Rea.
At least 300 people were killed in the massive 8.9-magnitude earthquake that hit Japan earlier on Friday, unleashing huge tsunamis along its Pacific coast, according to police and press reports.
"The consequences of the major earthquake and tsunami... are not yet clear and the impact on local people is of course foremost in everyone's minds," added Capital Economics.
"But the financial markets also need to consider the economic costs and the implications of the disaster for the public finances. These could be considerable."
Japan is burdened by the industrialised world's biggest debt, which runs close to 200 percent of gross domestic product (GDP).
Capital Economics stressed that the earthquake was not of the same impact as the devastating quake which ravaged the Japanese city of Kobe in 1995.
"This disaster is probably not the 'big one' that seismologists have long been fearing.
"Mercifully, the scale appears to be much less than that of the Great Hanshin-Awaji earthquake that hit Kobe on 17th January 1995.
"The Kobe earthquake left 6,434 dead and about 300,000 homeless, and caused damage estimated at 10 trillion yen ($100 billion at the exchange rates of the time)."
However, the earthquake could not have been timed much worse for Japan, according to Capital Economics.
The Japanese economy shrank by 1.3 percent in the three months to December, compared to a year earlier, official data had showed on Thursday. That was worse than the initial estimate of 1.1 percent.
"A large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control," added the consultancy.
"Overall, it will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster.
"At the very least, the scope for fiscal stimulus to mitigate the economic damage is much less than it was in 1995."