Japan
Prevalence of natural hazards
Japan is exposed to multiple hazards: Earthquakes, tsunamis and volcanic eruptions occur frequently, as do other hazards such as landslides, floods and typhoons.
The islands of Japan extend along the Pacific Ring of Fire, a region exposed to major earthquakes and active volcanoes. About 200 volcanoes, among them 60 that are active, are spread throughout the islands. Japan’s location at the meeting point of four tectonic plates creates significant seismic risk and explains Japan’s frequent earthquakes and tsunamis (MLIT, 2007). Earthquakes have caused more reported damage and disaster-related fatalities than any other hazard faced by Japan. The Great East Japan Earthquake of 2011 caused nearly 20 000 deaths and an estimated USD 210 billion in damages. Business disruptions and decreased domestic demand led to an estimated reduction in gross domestic product (GDP) of 3.5% in the first quarter and of 0.7% for the full year following the earthquake. The Kobe earthquake in 1995 caused over 5 000 fatalities and an estimated USD 100 billion in damages (Cabinet Office, Japan, 2016; Benson, Boudreau and Mahul, 2013).
With more than 75% of the land surface in Japan covered by mountains and hills, Japan is also subject to landslide and avalanche hazards. Landslides may occur after periods of intensive rainfall or be triggered by seismic events (Nadim et al., 2006). In 2014, torrential rainfall in Hiroshima Prefecture triggered a series of landslides that killed 82 and caused an estimated USD 38 million worth of damage, while the 2016 Kumamoto earthquake generated a series of landslides around Mount Aso that significantly contributed to the earthquake’s total damage of USD 20 billion (Miyabuchi, 2016; EM-DAT, 2017).
Flooding is also a concern in Japan. Its rivers are relatively short but have steep declivity, meaning that the ratio of peak flow discharge to basin area is relatively large and that water levels can rise rapidly (MLIT, 2007). In 2004, torrential rain in Niigata and Fukushima Prefectures caused more than 50 landslides and flash flooding along several rivers, resulting in 21 fatalities and an estimated USD 2 billion in damage. Japan has also experienced flooding from storm surges associated with typhoons, which frequently make landfall in Japan (MLIT, 2007). In 2000, a storm surge and heavy rainfall from typhoon Saomai triggered several landslides across Chūbu and Kansai, causing an estimated USD 7 billion in damage. Similarly, a storm surge, landslides and inland flash floods form typhoon Mireille led to 66 fatalities and an estimated USD 10 billion in damage in 1991; which made it Japan’s costliest storm in 30 years. Winter storms, such as the 2014 blizzard that hit large parts of Honshu and caused an estimated USD 5.9 billion in damage and 37 fatalities, have also caused significant damage in the past (EM-DAT, 2017).
Past fiscal impact of disasters
Annual average losses caused by disasters in Japan have been estimated at USD 61 billion (PreventionWeb, 2017). In line with the current moderate levels of disaster insurance penetration1 and broad explicit disaster-related contingent liabilities, the government of Japan provides a significant portion of the necessary post-disaster recovery resources (Cabinet Office, Japan, 2016; Mahul and White, 2012).
Between 1980 and 2016, the average annual amount of central government spending for disaster risk management through the general account budget was JPY 3.5 trillion (USD 31.4 billion) (Cabinet Office, Japan, 2016). Of this, 66% was allocated to ex post expenditure in response to disasters, while 34% was spent ex ante on prevention and mitigation measures and land conservation. However, since the 2011 Great East Japan Earthquake, the share of funding earmarked for ex post measures has increased to 75%, while the share spent on ex ante measures has been reduced to 25%.
Financial resources for post-disaster relief and recovery come from the annual reserve for disaster recovery, around JPY 73 billion (USD 656 million) and from a non-earmarked contingency reserve in the general account budget; the latter’s annual allocation is around JPY 350 billion (USD 3.1 billion) but may vary from year to year (OECD, 2010). When necessary, additional funding can be allocated through the supplementary budget system, which allows for budget reallocations in response to unexpected events. In the past, additional funding has also been obtained through government bonds and loans, as well as through increased revenue streams from tax increases, share sales, and reductions in the salaries of civil servants (Law Library of Congress, 2013). The ex post expenditure in response to disasters changes depending on their occurrence and severity of events, with large-scale disasters inducing significant spikes in central government spending.
Note: The figures for the 2016 fiscal year are preliminary, reflecting the initial budget.
Source: Cabinet Office, Japan, 2016.
The Great East Japan Earthquake in 2011, for example, resulted in government spending that represented an estimated 8% of its GDP and 20.7% of the general account budget in fiscal year 20122, totalling around USD 36.5 million (Sato and Boudreau, 2012; Mahul and White, 2012). Initially, funding for disaster relief, recovery and reconstruction was allocated via the general contingency reserve for fiscal years 2010 and 2011. Three supplementary budgets were passed in fiscal year 2011, with one relying largely on the issue of bonds and loans, one financed primarily via cuts in expenditure previously authorised for other purposes and one funded by budget surplus from the previous fiscal year. In fiscal year 2012 additional financing was appropriated, most of it through the issue of reconstruction bonds and loans (Sato and Boudreau, 2012; Benson, Boudreau and Mahul, 2013; Law Library of Congress, 2013).
Subnational governments play an important role in financing post-disaster relief and recovery efforts, as well as prevention efforts. The majority of recovery and reconstruction expenditure, however, is provided by the central government. To prevent disaster-related resource shortages at the subnational level, the Disaster Relief Act requires all prefecture governments to reserve 0.5% of general-purpose local taxes over three years in a disaster relief fund, and the central level may transfer additional resources to affected subnational governments in the aftermath of a disaster. The local reserve has to be spent and cannot be accumulated. If no disaster occurs in a given year, the funds can be spent on infrastructure repairs.
Source: MIC, 2016.
Source: MIC Japan, 2016/2017.
Managing disaster-related contingent liabilities
Identification of disaster-related contingent liabilities
Many of the disaster-related contingent liabilities in Japan are defined by its legal and policy frameworks for disaster management. There have, however, been instances in the past when society’s expectations of the government went beyond what it is explicitly obliged to provide. For the most severe disasters, specific acts may be enacted to free up additional resources to help fulfil both explicit and implicit post-disaster recovery obligations.
Explicit contingent liabilities
Explicit contingent liabilities arise from payment obligations that are based on laws, or clear policy commitments that could fall due in the event of disaster. In Japan, a number of laws recognise the government’s legal or explicit commitment to support disaster response and the reconstruction of public and private assets. Tables below illustrates the extent of the Japanese government’s legal responsibility to provide post-disaster financial assistance.
In Japan, municipalities have primary responsibility for the recovery and reconstruction of public assets (e.g. roads and public buildings), but the central government contributes financially in proportion to the scale of the disaster (OECD, 2009). According to the Act on National Treasury’s Sharing Of Expenses For Project To Recover Public Civil Engineering Works Damaged By Disaster (1951) and the Act on National Treasury's Sharing Of Expenses For Recovery Of Public School Facilities Damaged By Disaster (1953), the central government is required to furnish two-thirds of recovery expenditure for public infrastructure, with the remaining third covered by subnational governments. The central government owns a significant share of infrastructure. The Ministry of Land, Infrastructure, Transport and Tourism (MLIT), for example, owns 109 major river infrastructures as well as all national highways. Furthermore, where local governments issue bonds to cover the expenditure for post-disaster recovery and reconstruction of public infrastructure, 95% of the interest and redemption costs can be covered by the central government through the transfer fund to the local government. In that case, the central government covers 98.3% of the recovery cost of the infrastructure facilities in the aftermath of a disaster.
Source: MLIT (data submitted to authors).
The Disaster Relief Act (1947) and the Disaster Countermeasures Basic Act (1961) set out the responsibilities of central and subnational governments (prefectures) for disaster relief, and establish cost-sharing arrangements between central and subnational governments for disaster relief expenses. The subnational governments must provide emergency relief, including temporary housing and medical care along with food, water and other basic necessities. To speed up relief activities, the prefecture may delegate part of its responsibility to provide disaster relief to the municipal level. To ensure sufficient financial resources for the fulfilment of this obligation, prefectures are required to set aside reserves in prefectural disaster relief funds. If prefectural relief spending is less than 2% of the prefectural tax revenue projection for the relevant fiscal year, the central government is required to cover 50% of the disaster relief costs. In case the total amount exceeds 2% of the revenue projection, the central government can cover a maximum of 90%. For the removal of debris, the Waste Management and Public Cleansing Act (1970) specifies equal cost sharing between the central and subnational level.
The government’s explicit disaster-related contingent liabilities are not limited to the Act on Special Financial Support to Deal with Extremely Severe Disasters (1962) and the Act on Support for Livelihood Recovery of Disaster Victims (1998). The central and subnational governments are equally responsible for providing up to JPY 3 million (USD 30 000) in post-disaster subsidies to affected households for rehabilitation of housing. In addition, the laws provide the option of reducing taxes for affected citizens.
Under the Act on Provision of Disaster Condolence Grant (1973), additional financial support may be given to individuals who lost with family members in a disaster, or to disaster victims who suffered injury or disease. The exact amount of such post-disaster grants, which can be as high as JPY 5 million (USD 50 000), is determined by the municipality. For low-income households, these grants may be supplemented with special disaster victim support interest-free loans of up to JPY 12.7 million (USD 127 000). The central government and subnational governments (prefectures and municipalities) share these expenses equally.
Under the Disaster Countermeasures Basic Act, the central government is expected to accept local bonds to assist subnational governments in their disaster relief and recovery responsibilities3.
Under the Small and Medium-sized Enterprise Credit Insurance Act (1950), small and medium-sized enterprises (SMEs) that have been affected by a disaster are eligible for additional credit guarantees offered by the Credit Guarantee Association through a central government safety net guarantee programme. Additionally, safety net loans can be made available to affected SMEs that face temporary cash-flow problems due to radical changes in the business environment, including those caused by a disaster. The Act on Financial Support of Farmers, Forestry Workers and Fishery Workers Suffering from Natural Disasters (1964) provides low-interest loans for businesses in the primary sector, such as agriculture and aquaculture businesses. The loans may be used for purchases for agricultural purposes, such as for seeds, fertiliser, livestock and agricultural equipment. The central and subnational governments together with the affected association (e.g. the fishermen’s association) finance these loans equally.
The central government retains a portion of liability with Japan Earthquake Reinsurance (JER), through an arrangement with the private insurance market (OECD, 2015). Under this scheme, the private and public sectors share the aggregate limit of indemnity for a single seismic event (JPY 11.3 trillion, USD 103 billion), as follows:
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For earthquake insurance liabilities up to JPY 88 billion (USD 804 million), the JER is liable for 100 % of insurance claims.
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Over JPY 88 billion and up to JPY 224 billion (USD 2.06 billion), the central government is liable for 50% while the JER and private insurers ( i.e. those to which the JER has retroceded risk) are liable for 50%.
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From JPY 224 billion to JPY 11.3 trillion (USD 103 billion), the central government is liable for approximately 99.8% and private insurers (including the JER) are liable for approximately 0.2%.
If earthquake insurance liabilities for one event exceed the indemnity cap of JPY 11.3 trillion (USD 103 trillion), the decision about providing funding is informed by the perspectives of relevant stakeholders (OECD, 2015). The Ministry of Finance has increased the central government’s share of indemnity as a result of the reduced reserve balance of the private sector after recent large-scale disasters.
Implicit contingent liabilities
Underpinning, the broad explicit contingent liabilities such as those outlined above – and potentially expanding them – are the implicit expectations of society. Following an extremely severe disaster, the Japanese government has been expected to restore social and economic well-being beyond the explicit liabilities outlined above. This approach is in line with traditional Japanese values, such as a strong sense of community and group solidarity, and can also create significant implicit contingent liabilities (Sato and Boudreau, 2012). The Act on Special Financial Support to Deal with Extremely Severe Disasters (1962) provides the legal framework for expanding the central government’s disaster-related contingent liabilities; specifically, it holds the central government responsible for providing additional financial assistance to subnational governments and to disaster victims. Such financial assistance is varied and can include additional financing for the recovery of public infrastructure; additional subsidies for the recovery of residential buildings; and additional unemployment benefits. Areas eligible for special financial aid are determined by cabinet decree. Between 2012 and 2016, the cabinet designated 21 disasters as extremely severe.
One such disaster was the Great East Japan Earthquake. One of the largest earthquakes and one of the costliest disaster ever recorded, it triggered an expansion of the government’s explicit disaster-related contingent liabilities. In light of the disaster’s unprecedented impact, the central government shouldered a much greater share of the fiscal burden than it was legally required. To enable speedy recovery in the aftermath of the event, the central government covered nearly all costs related to disaster relief and recovery in the early recovery stage, as the scale of the disaster by far exceeded subnational financing capacities.4 In addition, the central government financed 80% (rather than the usual 50%) of the costs related to post-disaster subsidies earmarked for the rehabilitation of housing, and 70% (rather than the usual 50%) of the costs related to condolence grants (Sato and Boudreau, 2012).
The central government also implemented a series of tax measures to support the disaster-affected population and enterprises, ranging from special treatment for asset losses (such as income and local tax deductions) and real estate tax exemptions in areas affected by tsunami, to tax incentives and financial subsidies for investments in the affected areas. The SMEs affected were also eligible for tax reductions on oil, alcohol and tobacco taxes, and were given extended deadlines for the payment of other taxes (Sato and Boudreau, 2012; Law Library of Congress, 2013).
In addition, the industries eligible for special loans and debt-restructuring schemes under the Small and Medium-sized Enterprise Basic Act (1963) were expanded to include the construction industry, where in addition interest rates were lowered and application periods for the available support schemes were extended. Under the two programmes set up to facilitate the provision of loans and credit guarantees, affected SMEs received almost 340 000 loans totalling over JPY 7.4 trillion (USD 62.7 billion) in fiscal year 2012. Businesses in affected areas were also eligible for support under the new Restoration and Maintenance Subsidy Project for Facilities of Small and Medium Enterprise Groups. Through the project, 525 affected SMEs received around JPY 272.3 billion (USD 2.4 billion) in subsidies from the central government in fiscal year 2012, and prefectural governments added another JPY 123.1 billion (USD 1.2 billion). In addition, cost-free loans and lease subsidies to set up temporary stores and factories and to lease equipment were made available via municipal governments. For businesses that suffered severe damage from the nuclear disaster in Fukushima, the Ministry of Economy, Trade and Industry (METI) made available around JPY 12 billion (USD 107 million) in long-term, interest-free, unsecured loans (Law Library of Congress, 2013; METI, 2013).
Despite the support programmes for businesses, the number of applicants for employment insurance benefits grew nationwide by 40% in the ten months following the earthquake. In response to this need, the Ministry of Health, Labour and Welfare (MHLW) increased by 60 days the duration of unemployment benefits for those unemployed due to the Great East Japan Earthquake, bringing the total days available to 210 (or 230 for those who lived in the area directly affected by the tsunami and nuclear disaster). As a result, the number of individuals receiving unemployment benefits in the disaster-stricken prefectures increased by 104% between January 2011 and January 2012 (Higuchi et al., 2012). The MHLW also used resources from the existing Employment Creation Fund to grant JPY 900 000 (USD 9 000) to SMEs that hired a job-seeking disaster victim within 18 months following the event, while the METI provided special support to new graduates in the affected areas (Law Library of Congress, 2013).
Estimation of insurance payouts
Although Japan currently has no disaster risk insurance scheme for government assets, infrastructure assets owned and administered by private and quasi-public companies, such as railroads, airports and ports, are typically covered by private insurance. For example, quasi-public railroad companies, most of which are partly owned by municipalities, have been taking out group insurance – with the industry association the designated policy holder – to reduce and stabilise the premium.
In Japan, private household disaster insurance penetration is moderate. Only 29.5% of households have private insurance for earthquake, tsunami and volcanic activity that protects assets (specifically buildings for residential use and household goods) (Cabinet Office Japan, 2016) and that is backed by the government-supported Japan Earthquake Reinsurance. The premiums are risk based, and consequently are vary across prefectures and depending on the construction material used; discounts are available for earthquake-resistant buildings (Mahul and White, 2012; MoF, n.d.). An estimated 22% of households are covered by hazard insurance offered by co-operative mutual insurers, which includes coverage of residential dwellings against damage caused by fire and natural hazards such as flooding and earthquakes. The policies are more comprehensive than those offered by private insurers and are offered at flat premium rates; in this they resemble a saving mechanism. Insurance coverage rates vary by location. In areas very exposed to risks, awareness tends to be higher and so insurance coverage rates are higher as well. Major earthquake events tend to trigger an increase in insurance purchases.
For private businesses, natural hazard insurance (for floods and earthquakes) is available through corporate fire insurance policies. The premium of such subscriptions is significantly higher than for policies backed by Japan Earthquake Reinsurance. The government has not made efforts to promote the take-up of business insurance, perhaps because of premium rates, and perhaps because of the government assistance already provided to businesses in case of a disaster. The latter would include, for example, subsidies for the renovation of assets.
Co-operative mutual insurers offer disaster insurance outside the JER scheme, but are accountable to their respective ministries. For example, the biggest co-operative mutual insurer, the National Mutual Insurance Federation of Agriculture (JA Kyosai) reports to the Ministry of Agriculture, Forestry and Fisheries, but cedes the majority of its liabilities to international reinsurance markets. This approach results in significantly higher premiums than those backed by Japan Earthquake Reinsurance (Mahul and White, 2012).
The Financial Services Agency (FSA), which oversees the insurance sector and other financial services in Japan, has been keeping track of insured losses arising from large disasters based on data collected from each individual insurer. In addition, the General Insurance Rating Organisation of Japan decides on the size of insurance payouts in the case of earthquakes. The number of payments by insurance companies is later published, technically allowing an estimation of future public contingent liabilities related to damage to residential and commercial assets. Nevertheless, there currently is no direct link between insurance payouts and the level of public payments (OECD, 2015; FSA, 2016; Benson, Boudreau and Mahul, 2013).
Quantification of disaster-related contingent liabilities
Currently, disaster-related contingent liabilities are not quantified ex ante in Japan, but public spending in response to disasters is recorded and publicly disclosed ex post. The table below provides an overview of the disaster-related spending publicly disclosed on the website of the Ministry of Finance (MoF, 2017).
National repositories that collect information on infrastructure and its vulnerability characteristics can help governments systematically assess the exposure of public infrastructure to major natural hazards, and hence contribute significantly to an understanding of potential government liabilities. Japan ensures that this information is collected by river management authorities (and others), but no single centralised national repository seems to exists. MLIT draws up technical standards and encourages monitoring of infrastructure conditions by subnational governments.
Estimating the fiscal impacts of disaster-related contingent liabilities and integrating them into overall fiscal forecasting
The MoF, through its Budget Bureau, is the lead institution for fiscal policy making in Japan. The Budget Bureau drafts the initial annual budget, which is then submitted to the cabinet for revision and submission to Parliament.
In terms of fiscal forecasts, the Cabinet Office publishes an annual economic and fiscal outlook5 as part of budgetary preparation for the forthcoming fiscal year. The outlook discusses medium- and long-term projections of government revenues and expenditures. It may include an outlook on projected expenditure for ongoing recovery and reconstruction efforts for disasters that occurred in previous fiscal years; the 2011 Great East Japan Earthquake, for example, continued to require funding throughout fiscal year 2017, perhaps even until 2021. Although fiscal forecasting documents include projected expenditure in support of ongoing disaster relief and recovery efforts, they do not integrate the estimated fiscal impacts of potential future disaster-related contingent liabilities.
Prior to the 2011 Great East Japan Earthquake, the Central Disaster Management Council6 also conducted a series of damage analyses, including a comprehensive assessment of the expected impacts of potential major events, such as earthquakes in the Tokyo region or along the Chishima trench. The scenarios estimated the likely human and physical damages as well as the potential economic impact of these disasters, but did not quantify the expected fiscal impact. The Great East Japan Earthquake revealed shortcomings in the available approaches to quantify the impacts of disasters ex ante – the actual damage that occurred far exceeded what had been predicted (Government of Mexico and World Bank, 2012; OECD, 2015; Ali, 2016).
Japan has aimed to manage major disasters in a revenue-neutral manner, through raising taxes and issuing bonds. For this approach to work in the future, an important precondition is a prudent fiscal strategy.
Implementation arrangements for providing post-disaster financial assistance
The responsibility for post-disaster relief and recovery in Japan is shared between subnational governments and the central government, but most of the financial liability falls to the latter. In case of budgetary shortfalls at the subnational level, the central government is expected to channel additional resources through cost-sharing arrangements and loans to the subnational governments affected.
Municipalities have primary responsibility for recovery and reconstruction expenditures for public assets (roads or public buildings), although the central government makes a significant financial contribution, in proportion to the scale of the disaster.
For disaster recovery assistance to affected citizens, the central and subnational governments typically share the cost. In case of exceptionally large-scale disasters, such as the Great East Japan Earthquake, the central government contribution in support of emergency relief and recovery can be increased. provides an overview of the roles and responsibilities of central and subnational governments in the provision of post-disaster assistance to disaster victims.
Source: Adapted from MHLW, 2011
At the central government level, the MOF manages the general contingency reserve. The Cabinet Office and the Central Disaster Management Council has a co-ordinating role in the disaster management phase and ensures efficient and adequate support for disaster relief and recovery. Where necessary, the Cabinet Office delegates responsibilities to the respective line ministries, such as the MLIT, and agencies. The MHLW leads in facilitating measures to support businesses from the primary sector and SMEs, and provides unemployment benefits and other measures related to re-employment and the recovery of social welfare facilities.
Mitigating disaster-related contingent liabilities and financing residual risks
To mitigate previously identified, quantified and disclosed disaster-related fiscal risks, governments need to control and ideally reduce the size of contingent liabilities and decide on how to provision for the residual risk.
Japan seeks to manage its disaster-related contingent liabilities ex ante, as follows:
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The central government limits its commitments by sharing costs for disaster reconstruction with subnational governments, hence limiting contingent liabilities exposure,
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By offering income tax deductions for earthquake insurance premiums, the government encourages stakeholders to reduce or transfer disaster risks they face.
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There are centralised controls over the granting of government guarantees for disaster losses.
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There are dedicated subnational reserve funds and a general contingency reserve at the central level.
On the disaster risk financing side, Japan has considered the potential contributions of investments in risk reduction and established a financing mix that builds on a general contingency reserve and subnational disaster relief funds as ex ante provisions for disaster response. In case of larger-scale disasters, ex post budget adjustments are possible through the supplementary budget system, as well as off-budget spending through loans and bonds.
As part of its strategy to provision for disaster risks, Japan invests significantly in prevention, mitigation and preparedness measures. These in turn contribute to a reduction in disaster-related contingent liabilities. Much like the responsibilities for disaster relief and recovery, those for disaster risk reduction and mitigation are shared across levels of government. The Cabinet Office designs the Basic Disaster Management Plan, the national blueprint for disaster risk management, while prefectural and municipal disaster management councils design local disaster management plans in line with it. To ensure sufficient funding for the implementation of structural and non-structural measures for disaster risk reduction and mitigation, the efforts of the central and subnational governments complement each other. The MLIT, for example, is in charge of protective works along large rivers, while protective works along smaller rivers are implemented by subnational governments, which can request central-level subsidies (OECD, 2009).
In addition, through non-structural measures such as assessing and modelling exposure and communicating the results to a wide audience, Japan is building an enabling environment for mainstreaming self-protection measures and increasing insurance coverage.
Since 1980, the central government has invested an annual average of around JPY 721 billion (USD 6.4 billion) in disaster prevention measures, and an annual average of around JPY 1.5 trillion (USD 13.5 billion) in land conservation. In addition, an annual average of around JPY 31 billion (USD 278 million) has been spent in support of science and technology research for disaster risk reduction. The subnational (prefectural and municipal) contribution to this is more difficult to quantify, as only limited disaggregated information is available on subnational disaster-related expenditures.
References
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Notes
← 1. Of the damage caused by the 2016 Kumamoto earthquake, for example, only 15% was covered by insurance, while around 16% of the damage caused by the Great East Japan Earthquake was insured (Aon, 2017; Mahul and White, 2012).
← 2. In Japan, the fiscal year runs from 1 April until 31 March of the following year.
← 3. Financial liabilities (debts) of subnational governments to the central government can be carried over to following fiscal years to be repaid once sufficient subnational revenue is available.
← 4. This was especially the case in the three most affected prefectures: Fukushima, Iwate and Miyagi.
← 5. www5.cao.go.jp/keizai3/econome/h29eiyaku1.pdf.
← 6. The Central Disaster Management Council is a co-ordinating body within the Cabinet Office of Japan. Under the authority of the Prime Minister, the Council promotes a comprehensive approach to disaster management inside the government (Cabinet Office, Japan, 2016).