What factors determine economic strength in the restoration process from extreme disasters?

It appears that some regions in Japan have recovered or been restored from the severe damage of earthquakes much faster and over a longer period than anticipated. This chapter focuses on the difference between the economic situations after the Great Hanshin Earthquake in 1995 and the Great East Japan Earthquake in 2011. The authors seek the reason for this difference in terms of theoretical understanding with a simple Ramsey growth model setting. They describe the restoration process of the stricken areas from severe damage of capital deterioration by large natural disaster. Then, the concepts of “direct damage cost” and “dynamic damage cost” are introduced to explain political rationality about financial aid or assistance from outside regions. Another contribution of the chapter is a steady state shifting model. The model incorporates an alternative impact on the macro-economy, a change in the residents’ foresight regarding the frequency of large subsequent earthquakes. It logically clarifies the difference in the situations following those two representative earthquakes and may inspire readers to consider better protection strategies against large natural disasters.