The Economic Impact of Heavy Rains on Supply Chains

Abstract

As an effect of global climate change, precipitation is increasing globally, and disasters related to heavy rains such as floods or landslides pose enormous risks of economic losses. Although the destruction of buildings and infrastructure is itself an economic loss, losses can also arise from supply chain disruptions. When firms directly damaged by a disaster reduce their production, their suppliers and customers also need to reduce production because of demand and supply shortages, resulting in substantial indirect effects. This study focuses on the heavy rains in July 2020 in Japan and the ensuing economic damage by using an agent-based model with the actual supply chain relations of 1.6 million firms in Japan. We reveal that daily losses peaked after the heavy rain events with a 50-day delay. This delayed peak means that the shock directly reduced firms' demand and supply and thereby propagated through supply chains. We also reveal that less economically developed areas are less protected from heavy rains and vice versa. Moreover, we reveal that multiple heavy rainfalls in a short period cause more damage to the economy because earlier damage to supply chains remains and interacts with new damage.

Keywords: Heavy rain; Disaster; Supply chain; Propagation; Agent-based model; Simulation

JEL Classification: L14