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Improving Earthquake Resistance to Expand Demand

Tags: Regulation , Economy , Housing , Disaster , Fiscal Policy

Iwai, Katsuhito

June 03, 2009

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Despite being an earthquake-ridden country, Japan applies only minimum standards for earthquake resistance in its building code, leaving it vulnerable to serious loss of life when big temblors like the 1995 Kobe earthquake strike. Upgrading the standards for quake-proofing buildings would promote safety, improve housing quality, and stimulate domestic demand.

US President Ronald Reagan once flatly declared, “Government is not the solution to our problem; government is the problem.” A quarter of a century has since passed, and a huge price has now fallen due in the form of a once-in-a-century crisis. It has compelled people to learn once again that government is indispensable for dealing with the unstable nature of capitalism. Today, governments around the world are hard at work generating effective demand. Japan as well, although falling behind in the world as a result of political confusion, is finally addressing the task of stimulating domestic demand. This is to be welcomed.

While there is indeed a need to generate demand, it does not provide justification for a shotgun approach marked by the construction of more roads and train lines. Especially now, when countries have cast off the shackles of the laissez-faire line that government is the problem and are embarking on a quantitative expansion of domestic demand, the task of upgrading policy measures qualitatively must be given serious thought. From the short-term perspective, Japan should apply stimulus on a priority basis to industries with strong multiplier effects on related industries, and from the long-term perspective, it should engage in socially beneficial capital formation.

How does the stimulus package prepared by the government measure up? On the policy menu can be found tax relief for housing, which has been allocated ¥340 billion. Because the industries involved in housing construction have a broad base and powerful multiplier effects, housing tax cuts have invariably been a component of the stimulus packages prepared to date. At the same time, the quality of Japan’s housing stock is by no means high. Compared with housing in Western countries, Japanese housing is clearly inferior. The average Japanese house, it is reported, will be torn down after only some 30 years of use. Such is the gravity of this problem that the government is promoting a plan to create what it calls “200-year housing.”

The Building Standard Law

Why does Japan have such poor housing? At the root of the problem is the current Building Standard Law. Short of a revision of this measure, the latest round of fiscal stimulation will have little chance of improving the quality of housing. The Building Standard Law is the core component of the legislation regulating the construction of buildings in Japan. While many people are under the impression that this code serves to guarantee the safety of the structures they live in Article 1 of the law itself states that: “The objective of this law is to establish minimum standards regarding the site, structure, facilities, and use of buildings in order to protect life, health, and property of the nation, and thereby to contribute to promoting public welfare.” This provision makes it quite clear that the law seeks only to establish minimum standards, and it does not say that compliance with the minimum standards will guarantee of safety. Not only that, nowhere in the law is there any promise that the government will provide compensation in the event that a building meeting its standards happens to collapse.

The law went into effect back in 1950, when Japan was still getting back on its feet from the destruction of World War II. Homes that amounted to little more than barracks were being built one after another, and the purpose of the law was merely to establish a bare minimum level of requirements so as to ensure that these structures would not easily collapse or burn down. Although the law has been amended a number of times over the years, including a 1981 revision introducing new standards for earthquake resistance, its basic spirit remains unchanged.

In the area of earthquake resistance, another system introduced under the Housing Quality Assurance Law, which went into effect in 2000, divides buildings into three grades according to their ability to withstand earthquakes. The minimum standards of the Building Standard Law correspond to grade 1, the lowest of the three seismic capacity grades. These grades were the subject of a study by Associate Professor Masayuki Kohiyama and Mr. Kento Sasaki at Keio University, who investigated how well the buildings of each grade would resist earthquakes of different strengths on the Japanese seismic intensity scale of 0 to 7. They found that in the case of a two-story wooden structure rocked by seismic vibration in the upper range of level-6 intensity, the danger of collapse for grades 1 through 3 would be 1.3%, 0.11%, and 0.02%, respectively.  In the case of a level-7 quake, however, 28% of the grade-1 buildings would come tumbling down, compared with 7.9% for grade 2 and 3.5% for grade 3.

In this way, the study found that as long as the shocks produced by an earthquake do not exceed the upper 6 level, there is not much chance of people being crushed by the collapse of wooden houses, provided these structures meet at least the minimum criteria mandated by the Building Standard Law. To be sure, some houses might still have to be rebuilt as a result of becoming seriously warped. In the event of a level-7 quake, however, the damage would be likely to include the loss of human life. And level 7, it may be recalled, was the intensity recorded in some of the areas hit by the 1995 Kobe earthquake. In Japan at present there are many condominiums and high-rise buildings that meet only the minimum standards. Without being aware of it, many residents are living at risk to life and property.

The Aneha Scandal

Before beginning research for the Tokyo Foundation project on the Building Standard Law, the present authors assumed that the law served to guarantee safety. Along with many other Japanese, we were under the spell of a “safety illusion.” What sparked the launching of the project was the so-called Aneha scandal centering on Mr. Hidetsugu Aneha, an architect and builder then holding a first-class architect license. Late in 2005 it was discovered that Aneha had designed condominium buildings and hotels that failed to meet the standards for earthquake resistance. It turned out that he had falsified the structural calculations he submitted to the regulators, and his plans had passed the building-confirmation screening without anybody noticing the problem. The charges lodged against him drew attention to his fabrication, and subsequent investigations revealed that he had submitted bogus data for about 100 buildings.

The scandal bred widespread distrust in the systems of certifying architects and confirming building plans. The Ministry of Land, Infrastructure, Transport, and Tourism (MLIT) responded by revising the building code and strengthening approval procedures, and it imposed the rule that when buildings exceed a certain height, the designs must be screened by a certification agency. As a result of the overhaul of the regulatory controls, however, the work of confirming building plans fell far behind schedule for a while, and the construction and real estate industries suffered large losses. This series of developments resulted in what came to be called a government-made business slump, one that will go down in history as a classic example of economic stagnation caused by regulators who take no note of the real world of business when changing the regulatory system.

As our project moved forward, we noticed that the media frenzy and the legal changes made by flurried MLIT officials had not just opened the door to a government-made slump. The only purpose all the commotion was serving, we came to believe, was to cover up a fundamental flaw in the housing market, which is that even though Japan is an earthquake-ridden archipelago, it has not adequately fostered a market supplying buildings with safety as their selling point.

The new regulatory system should suffice to prevent another scandal of the same type. But even though the approval process has been reinforced, no change has been made to what is being confirmed, which is only compliance with minimum standards. Worse than that, the more rigorous the approval procedures become, the more architects and building owners will focus only on the accuracy of quake-proofing structural calculations, with the result that minimum standards will gain increased authority, strengthening the illusion that they guarantee safety. In addition, the complications of the new procedures will rob architects of freedom and make it harder for them to concentrate on what they, as professionals, are supposed to be doing, which is designing safe, high-quality buildings.

The Cost of Better Quake-Proofing

In this situation, what is to be done to cultivate a market in Japan providing a supply of safe buildings? From the start, safety is something that specialists must ascertain by studying blueprints, since it is hard to tell how strong a building is just by making an exterior inspection after it has been constructed. It also needs to be noted that the responsibility for assuring safety is hard to pin down, because many parties are involved from the design to the sale stage. In the case of condominiums in particular, the constructor is not likely to either own or use the building and has little incentive to check carefully for problems during the designing and construction.

When asymmetry in information becomes extreme, as in this case, economic theory teaches that the brand name of the product plays a critical role. If safety can be made a selling point, makers of brands known for their safety will step forward. In exchange for undertaking responsibility for earthquake resistance, housing developers would be able to realize a profit by setting prices that adequately cover their increased construction costs and risks.

Needless to say, safety does not come for free. If the price of a safe house is too high, a buyer will opt instead for one meeting just the minimum standards. As it turns out, however, better quake-proofing is not all that expensive. As the accompanying table shows, upgrading a building to improve its seismic capacity grade from 1 to 2 adds just 1%–3% to total construction costs, and raising the grade from 1 to 3 makes the building only 3%–5% more expensive. Even with these increased costs, housing prices would remain in a range many home buyers can afford.

But as the study by Kohiyama and Sasaki also demonstrates, many residents are under the impression that superior earthquake resistance is far more costly than that. The popular perception is that strengthening a building from grade 1 to grade 2 would add 5%–30% to costs, while strengthening from grade 1 to grade 3 would add 10%–50%. Hidden behind this wide perception gap is the safety illusion we mentioned. As long as the public is under the sway of the false impression that the Building Standard Law ensures safety despite setting only minimum standards, there will not be much demand for buildings offering greater safety, and people will not even bother to explore the costs. With no demand there will be no supply, and a market for brands assuring safety will fail to form.

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On the basis of this analysis, we have proposed an amendment of the Building Standard Law. Briefly stated, we recommend that the current regulations be switched from minimum standards to a set of “standard norms,” that earthquake-resistance performance be specified for several grades (five grades, for instance), and that notification of the grade be required when a building is constructed, sold, or rented. We offer these proposals in the belief that when consumers come into possession of accurate information on the risks and costs of the respective grades, construction and real estate circles will have an incentive to engage in competition directed at the establishment of brands assuring safety. We further believe that there could be no better time for embarking on qualitative improvement in the housing market than today, when the government is already pursuing a policy of quantitative market expansion. Indeed, we would say that the advent of a market for safe housing brands would lead to domestic demand expansion in the truest sense of the term.

This English translation is based on an article carried in the Keizai Kyoshitsu column of the Nihon Keizai Shimbun on February 16, 2009.


Gist of the Tokyo Foundation Proposal for Amending the Building Standard Law

Proposal 1. Revising the law’s objective and establishing an expert committee on earthquake-resistance standards

Revise the objective of the Building Standard Law stated in Article 1 to specify that it is “to establish standards based on the latest scientific knowledge of the present day.” Organize an expert committee to update earthquake-resistance standards periodically (every five years, for instance) so that they always reflect the latest knowledge.

Proposal 2. Switching from minimum standards to standard norms

Switch the requirements of the Building Standard Law from “minimum standards” to “standard norms” and specify several seismic capacity grades ranging from +2 to –2 (with –2 corresponding to the minimum standards of the current law). Require designers to inform building owners of the grade of the design, explain the risks of earthquake damage for each grade, and secure their prior agreement.

Proposal 3. Requiring notification of seismic capacity grades

In addition to proposals 1 and 2, require sellers and lessors of housing to disclose and explain to buyers and lessees which seismic capacity grade was used for the construction.

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