Estimating the Nankai Trough Megathrust Earthquake’s Anticipated Fiscal Impact on Japanese Governments

This study estimates the fiscal impact of the anticipated Nankai Trough Megathrust Earthquake on both the national and local Japanese governments to identify their sovereign risk. First, we estimate the impact of the Great East Japan Earthquake on local public finance using panel data regressions on 2008–2015 fiscal data. Second, based on the anticipated damage data – seismic intensity and area of inundation – of the Nankai earthquake and the coefficients derived from the first step, we estimate the amounts of fiscal revenue and expenditures that would be required by every local government for the anticipated Nankai earthquake. Finally, we estimate the fiscal expenditure of the national government in proportion to the estimated local ones. We find that first, the estimated fiscal requirements in the two years after the earthquake are about JPY 161 trillion, 5.9 times those of the 2011 Great East Japan Earthquake. Second, the financial disparity between affected and non-affected local governments is large because the Nankai earthquake would affect more municipalities than the Great East Japan Earthquake. The fiscal burden of non-affected municipalities would be relatively higher. These findings indicate that the Nankai earthquake will not only be a local disaster but also a national catastrophe.