After the week that shook Japan, the nation starts to count the cost

Rebuilding after the earthquake and tsunami disaster will cost tens of billions of pounds. Yet many believe it will revive a moribund economy.

On the drive north out of Sendai city in northeast Japan, a slip-road takes you to a motorway that would normally be filled with traffic but was this week a scene of destruction to rival the most far-fetched Hollywood disaster movie. A thick coating of mud had been deposited at the toll booth, along with smashed vehicles, motorbikes and heavy machinery from a nearby factory. Beyond the booth, the road rose up to meet the highway and a panoramic view of the blitzed landscape below, where a jumble of hundreds of cars, trucks and splintered debris stretched as far as the eye could see. In the background, thick black smoke billowed from fires burning at a damaged oil refinery near the city bay.

Last Friday's huge tsunami inflicted similar damage all along the pulverised north-east of Japan's Pacific coastline, destroying farms, factories, villages and whole towns, driving everything in its path inland, in some cases by two or more kilometres, and carrying thousands of people back to a watery grave.

The wreckage and heartbreaking loss of human life have almost been overshadowed by the nuclear crisis that has unfolded in Fukushima Prefecture, which calls into question Japan's entire energy strategy and may snuff out its powerful nuclear industry, as the nation considers the folly of erecting so many plants on one of the most seismically unstable platforms on the planet.

Even as the search for bodies goes on, economists and insurers are calculating the mind-boggling costs of the clean-up: one British insurer estimates the bill at £37bn. Japan's stock market initially plummeted by £177 billion and several percentage points will almost certainly be wiped off its GDP. And then there is the awful human drama: nearly half a million homeless, perhaps 10,000 dead, many thousands more injured and the terrifying prospect – not unthinkable – of thousands more deaths from radiation-related cancer.

Not surprisingly, the debate has already begun: can this battered nation ever rise again? Japan had, after all, been sliding for two decades before the Pacific tectonic plates shifted with such explosive force last Friday – its economy overtaken by China, its population ageing and its people saddled with the developed world's largest public debt. But this is also a nation that has a remarkable, perhaps unique, history of rebirth after destruction on a biblical scale. In 1923, a 7.9-quake and tsunami famously levelled much of Yokohama and Tokyo, killing at least 100,000 people; the anniversary of the tragedy, 1 September, is now an annual disaster prevention day. Quakes have regularly brought the city to its knees and even the national icon, Mt Fuji, looms threateningly 100km away, always ready to spew ash down on the world's largest metropolis.

Nature hasn't been the only assailant. In March 1945 US bombers dropped close to half a million incendiary bombs on sleeping Tokyo, reducing 40 sq km of the city to cinders and killing 100,000 people who were "scorched, boiled and baked to death", in the words of the attack's architect, General Curtis LeMay. It was then the largest mass killing of the Second World War, dwarfing even the destruction of the German city of Dresden the previous month. The firebombing of Tokyo, one of the great forgotten war crimes, was of course part of a much larger American strategy that included dozens of similar raids on Japanese cities and culminated in the atomic bombing of Hiroshima and Nagasaki in August of the same year.

By the end of the war, nearly 70 cities had been reduced to rubble and well over half a million people, mostly civilians, had been killed. LeMay reportedly said: "If we had lost the war, we would have been tried as war criminals."

The war killed about four million Japanese, wiped out a quarter of the nation's national wealth, and led to the confiscation of all its colonial booty, including Taiwan and South Korea. Yet, the country engineered probably the most remarkable feat of economic regeneration in history, transforming itself in just three decades into the world's second-largest economy. This achievement was called the Japanese economic miracle and there was a time, just 20 years ago, when some predicted it would overtake the US.

Even among those who lament the monumental folly of the Pacific War, there is enormous admiration for Japan's ability to dust itself off from tragedy and start again. "If there is a single word to describe the Japanese people it is resilience," says Roger Pulvers, a US journalist and academic who has spent 44 years in Japan and written dozens of books about the country.

"The two great disasters of the 20th century – one natural, the other manmade – prove, in their single-minded recovery, that the Japanese people will prevail in this horrendous trauma and even come out of it leaner and meaner."

One reason for this resilience is the natural environment: after millennia of quakes, tsunamis and volcanoes, Japan is used to rebuilding, and has less faith in the permanence of physical objects. Dwellings and even office buildings are torn down and put up every 20 or 30 years. Houses devalue as soon as they are complete and are usually worthless by the end of their short lives. Temples are painstakingly reconstructed again and again on the same spot for hundreds of years. As one commentator wrote, "the Japanese manage to build change right into the heart of tradition".

The demanding natural environment has also surely shaped the national character, which is famously stoic and reserved – at least on the surface. One of my most haunting memories from the 1995 Kobe earthquake, which levelled much of the historic port city and took 6,500 lives, is of a meeting with a university professor, in a public toilet.

As we washed hands, he thanked me for coming to the city to volunteer in the distribution of water and supplies, then calmly told me that his wife had been crushed beside him in bed by a beam from their ceiling. Registering my shock, he apologised for causing me distress, bowed and walked away.

As I walked through the ravaged town of Minami-Sanriku with two other journalists last weekend, we met two young men on their way to look for their homes. We were standing near the top of the town, our eyes following the tsunami's two-kilometre trail of muddy destruction toward the sea, eerily reminiscent of a Tim Burton animated movie with its spindly, post-apocalyptic landscape. It was clear that there was nothing left of their homes, or their families. But there were no tears – only stony faces and a short, stark reply when asked if they hoped to find anything: "Kakunin shimasu" (We have to make sure).

Of course, resilience and stoicism alone won't build rebuild factories, towns and shattered communities. That will take money – lots of it. Barclays Capital puts the estimated costs at 5,000 to 10,00 billion yen (£38bn-£76bn).

They are head-spinning sums, but they're misleading. The money will be ploughed back into one of the world's biggest construction projects, creating employment and wealth. Japan's construction sector is, proportionally, already the largest in the world. Economists suggest that the damage from the Kobe quake, in what was an industrial heartland, was worse than the current calamity, which mainly affects the rural coast. And this is still the third-biggest economy in the world: The Financial Times's authoritative Lex column concluded: "Japan is easily rich enough to deal with this catastrophe."

Paying for all this raises a question often rehearsed, most notably in a famous 1989 essay by Michael Lewis called "How a Tokyo earthquake could devastate Wall Street and the global economy": what will be the impact of Japan withdrawing vast amounts of capital from world markets to finance its own recovery? "The money for revival will come from the big Japanese banks and other financial institutions, which are sitting on huge liquid overseas investments, most notably US Treasury bonds," points out another veteran Japanese watcher, the Irish author Eamonn Fingleton. He says the markets are already speculating on just such a scenario, sending the yen soaring to a new post-war high this week.

But Karel vanWolferen, author of The Enigma of Japanese Power, doesn't believe this will crash the world financial markets. Like many who have followed this country for years, he believes the money and reconstruction will revitalise Japan's moribund economy, pulling it out of a two-decade funk and giving it some headwind to escape what he calls the doldrums of innovation. "Not only can Japan revive, I think it will, and in a very major way... Neo-liberals don't understand Japan because Japan is not a capitalist economy. It has always done things its own way."

The Japanese way – industrial planning co-ordinated by the state and financed by long-term dedicated capital – drove the economy to the top of the economic league tables before it ran out of steam in the early 1990s. With Wall Street doing a fine job of devastating itself and the global economy, perhaps the latter could be kick-started by directing capital and human resources into new technologies, particularly solar power. "Japan is ideally placed to do this," says VanWolferen. "Nuclear power is too dangerous and won't work."

For now, all this is speculation. This is a country reeling from what its own Prime Minister called its greatest challenge since the Second World War, a point underlined by this week's rare appearance of Emperor Akihito on television, inevitably reviving memories of previous national tragedies. The sight of the diminutive royal painstakingly reading his script struck some outside Japan as funny. But for many Japanese, even the apathetic young who barely know his name, his status as the father of the nation makes him an emotional rallying point, a focus for a nation licking its wounds. He would never be bold enough to suggest it but the message is clear: Japan is down, but not out.

Japan's crisis: Day by day

Day 1: At 2.46 pm on 11 March a magnitude-9 earthquake strikes Japan's north-east coast, triggering a devastating tsunami. Aftershocks follow.

Day 2: A state of emergency is declared. About 170,000 residents are evacuated from a 20km exclusion zone around the Fukushima nuclear power plant after an explosion hits a reactor.

Day 3: At least 10,000 people from a coastal town are missing. The official death toll is 1,800, millions are without power or water and 190 are in hospital for radiation exposure.

Day 4: A second explosion rocks the Fukushima plant. Share prices on the Tokyo stock exchange fall 6.18 per cent.

Day 5: Fires are reported at the plant, and dangerous levels of radiation are recorded nearby.

Day 6: Reports that water in the Fukushima reactor cooling pools is boiling prompts fears of a meltdown.

Day 7: Foreign governments suggest their citizens should leave Tokyo. Helicopters dump tonnes of water over the plant to cool the reactors.

Day 8: Japan raises the alert level at Fukushima from four to five on a scale of atomic incidents. The Chernobyl disaster was rated at seven. At least 17,000 people are dead or missing.