Described by Prime Minister Kan Naoto as “the worst disaster since the Second World War”, the earthquake which struck Japan on March 11 and subsequent tsunami have taken a high toll in human lives, destroyed entire cities, seriously damaged the transport system and interrupted energy supplies in large areas. The impact of this tragedy on the economic, production and finance systems of this country is so pronounced that it deserves to be discussed in detail as a discrete issue. The ongoing nuclear pollution crisis created by the disaster still certainly prevents us from developing an accurate cost analysis of its effects, but it is already clear that its impact will be profound and looks set to engender serious reflection on economic, political and social matters and result in fundamental changes.
Obtaining the resources and investments needed to meet the cost of repairs is already a major issue, given the difficult fiscal and budgetary position of the country. Nevertheless, there are some reasons for optimism and the country is displaying an impressive resilience, as it did throughout its history.
Although Japan is the country most subject to earthquakes, and most advanced in earthquake prevention technology – making it best prepared to withstand mother nature’s dark side –, the magnitude of the earthquake and subsequent tsunami, together with the unresolved nuclear crisis, created widespread devastation in the land of the “Rising Sun.” At the moment it is still very difficult to give a precise estimate of reconstruction costs, but the first studies quantify them roughly in the billions of dollars. Goldman Sachs, for example, estimates that the total cost of the damage to buildings, production facilities and the like could reach $185 billion, or 4% of Japan’s Gross Domestic Product (GDP). More pessimistic is the analysis of Lloyds, which considers possible costs to be nearer $295 billion. Losses caused by the panic which hit financial markets after the disaster must also be taken into account. Finally, we must not forget that prior to the earthquake the Japanese state had several institutional problems, such as political weakness, lack of raw materials and precious metals and, above all, a distressing national debt level of over 200% of GDP.
The continuous risk of meltdown at one or more of the reactors at the Fukushima nuclear power plant creates another economic and social risk. Already, the radiation leak from Fukushima reactors has affected the food industry and consumer confidence, bearing a potential future impact on both the exports and imports of the country.
The suspension of power supply is another concern, as this negatively affects not only the success of relief and reconstruction efforts, but also industrial and energy security. The quake has indeed led to the shutdown of 14 reactors out of a total of 54 and damaged the entire energy infrastructure of Japan, hitting several refineries and power plants. Recovery will therefore depend on their being a significant increase in the imports of Liquefied Natural Gas (LNG) and other refined products. For now, the government has been forced to introduce a drastic electricity consumption reduction program in the north. It is hard to say how long this program will be in place and what its impact on the recovery will be. However, given the already difficult economic situation in Japan, Goldman Sachs reckons that if breaks in electricity supply continue throughout 2011, the consequent decrease in production could push the country into deep recession. Already, the risk of this is quite high, as a recent report from Moody’s confirmed.
The earthquake has also had an impact on the land and sea transport systems. The main ports located in the north-east region were heavily damaged, creating a high risk of congestion in the southern ports. The refusal of some captains and owners to make stopovers in Tokyo and other Japanese ports for fear of radiation poisoning creates an additional stress factor in the system. The state of the transport system will determine the speed of reconstruction of the devastated areas. Good transport links are key to ensuring the resumption of technology exports.
Several of Japan’s key industries have been harmed by the damage to the industrial and transport infrastructure and power rationing. The closure of some factories that produced specific components for the automotive industry in the area hit by the earthquake could mean that 600,000 fewer vehicles worldwide will be produced in of the next few months. As for the electronics industry, companies with a high technological content to their products, such as Sony and Panasonic, have stopped the production of some components indefinitely. The economic impact will be considerable at the international level. Japan is a major hub in the Asian production chain: It provides high-tech electronic components to surrounding countries, which then assemble them to be sold globally.
It is overwhelmingly important for Japan to find adequate funding to restore its social, economic and productive infrastructure within the shortest possible time. The Minister of Finance, Yoshihiko Noda, has said he will seek to reduce some expenditures outlined in the previous financial budget to set aside the necessary funds for reconstruction. However, he has not yet disclosed how big these possible cuts will be, or whether it will be necessary to issue additional government bonds to generate these funds. “We must make sure that the compensation is adequate, but we must also keep the financial burden on the public to a minimum,” Noda told reporters on May 11 (New York Times, May 12, 2011). If the issue of new bonds proves necessary, economists predict that rating agencies may decide to avoid taking immediate action, but a “downgrade” would be likely in June, when the government unveils its tax and social security plans. Indeed, there are wide concerns over Japan’s ability to repay any loans, given its already high public debt of over 200% of GDP, which as a result of the earthquake could reach 218% of GDP by the end of the year, according to the International Monetary Fund (IMF).
Furthermore, the weakness of the government and the political obstacles that have undermined past attempts by Prime Minister Kan Naoto to reform the financial system create more uncertainty. A further “downgrading” by international rating agencies, after that of February 22, 2011, after that of February 22, 2011, would certainly have a significant negative effect on the ability of the country to get out of the crisis.
For the moment, it is worth mentioning that the Bank of Japan (BCG) has injected more than $325 billion in the market in an attempt to temper the volatility of the financial markets and to prevent the deterioration of the country’s reputation in the eyes of the various local and international market actors who will take their money out from Japan if the risk level reaches a critical threshold. On March 14, the BCG has more than doubled its acquisition of assets from $61 billion to approximately $160 billion to buffer it against the impact of the earthquake and tsunami. In recent weeks members of the G7 have also had to intervene in the market in an attempt to slow the steady appreciation of the yen against the dollar.
In these circumstances, the challenge the government will face in the coming months is huge, but there are at least three reasons to believe that Japan can deal with this tragedy. First, situations of this magnitude are not new in Japan. Having learnt from the Kobe earthquake of 1995, for which the government was totally unprepared, Japan has been able to demonstrate greater efficiency and responsiveness. For example, part of the road infrastructure has been restored in less than a week. In addition, the army, together with the local communities, has quickly set about working to clear away rubble in the earthquake-affected areas. Second, unlike in 1995, the affected area is not heavily populated or greatly industrialized. According to the calculations of Nomura, one of the major industrial and financial conglomerate groupings of Japan, the three most affected prefectures (designation of regions in Japan), Miyagi, Iwate and Fukushima, contribute only 3.6% of Japan’s GDP, although the major Japanese electronics manufacturers are concentrated in this area. Third, given the recent history of disasters in Asia, the situation is not as bad as it sounds.
In the short to medium term Japan will experience a likely slowdown in growth, an increase in the national debt and economic decline. However, reconstruction efforts should lead to GDP growth, which will have a positive impact on the construction and infrastructure sectors. Even the breaks in the chain of international production should diminish within a reasonable time, preventing too great a loss of competitiveness for the country. Finally, Japan may exploit its geographical position by taking advantage of the exponential growth in other Asian markets, where demand for high technology products is expected to grow in the increasing number of families with an income of $10,000 or more. In recent years Japanese exports to Asian markets have increased dramatically. Indeed, 25% of Japanese exports are directed toward China, while exports to the U.S. now account now for only 15%.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century
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Japan’s Earthquake: Financial Aftershocks and Reasons for Optimism
May 22, 2011
Described by Prime Minister Kan Naoto as “the worst disaster since the Second World War”, the earthquake which struck Japan on March 11 and subsequent tsunami have taken a high toll in human lives, destroyed entire cities, seriously damaged the transport system and interrupted energy supplies in large areas. The impact of this tragedy on the economic, production and finance systems of this country is so pronounced that it deserves to be discussed in detail as a discrete issue. The ongoing nuclear pollution crisis created by the disaster still certainly prevents us from developing an accurate cost analysis of its effects, but it is already clear that its impact will be profound and looks set to engender serious reflection on economic, political and social matters and result in fundamental changes.
Obtaining the resources and investments needed to meet the cost of repairs is already a major issue, given the difficult fiscal and budgetary position of the country. Nevertheless, there are some reasons for optimism and the country is displaying an impressive resilience, as it did throughout its history.
Although Japan is the country most subject to earthquakes, and most advanced in earthquake prevention technology – making it best prepared to withstand mother nature’s dark side –, the magnitude of the earthquake and subsequent tsunami, together with the unresolved nuclear crisis, created widespread devastation in the land of the “Rising Sun.” At the moment it is still very difficult to give a precise estimate of reconstruction costs, but the first studies quantify them roughly in the billions of dollars. Goldman Sachs, for example, estimates that the total cost of the damage to buildings, production facilities and the like could reach $185 billion, or 4% of Japan’s Gross Domestic Product (GDP). More pessimistic is the analysis of Lloyds, which considers possible costs to be nearer $295 billion. Losses caused by the panic which hit financial markets after the disaster must also be taken into account. Finally, we must not forget that prior to the earthquake the Japanese state had several institutional problems, such as political weakness, lack of raw materials and precious metals and, above all, a distressing national debt level of over 200% of GDP.
The continuous risk of meltdown at one or more of the reactors at the Fukushima nuclear power plant creates another economic and social risk. Already, the radiation leak from Fukushima reactors has affected the food industry and consumer confidence, bearing a potential future impact on both the exports and imports of the country.
The suspension of power supply is another concern, as this negatively affects not only the success of relief and reconstruction efforts, but also industrial and energy security. The quake has indeed led to the shutdown of 14 reactors out of a total of 54 and damaged the entire energy infrastructure of Japan, hitting several refineries and power plants. Recovery will therefore depend on their being a significant increase in the imports of Liquefied Natural Gas (LNG) and other refined products. For now, the government has been forced to introduce a drastic electricity consumption reduction program in the north. It is hard to say how long this program will be in place and what its impact on the recovery will be. However, given the already difficult economic situation in Japan, Goldman Sachs reckons that if breaks in electricity supply continue throughout 2011, the consequent decrease in production could push the country into deep recession. Already, the risk of this is quite high, as a recent report from Moody’s confirmed.
The earthquake has also had an impact on the land and sea transport systems. The main ports located in the north-east region were heavily damaged, creating a high risk of congestion in the southern ports. The refusal of some captains and owners to make stopovers in Tokyo and other Japanese ports for fear of radiation poisoning creates an additional stress factor in the system. The state of the transport system will determine the speed of reconstruction of the devastated areas. Good transport links are key to ensuring the resumption of technology exports.
Several of Japan’s key industries have been harmed by the damage to the industrial and transport infrastructure and power rationing. The closure of some factories that produced specific components for the automotive industry in the area hit by the earthquake could mean that 600,000 fewer vehicles worldwide will be produced in of the next few months. As for the electronics industry, companies with a high technological content to their products, such as Sony and Panasonic, have stopped the production of some components indefinitely. The economic impact will be considerable at the international level. Japan is a major hub in the Asian production chain: It provides high-tech electronic components to surrounding countries, which then assemble them to be sold globally.
It is overwhelmingly important for Japan to find adequate funding to restore its social, economic and productive infrastructure within the shortest possible time. The Minister of Finance, Yoshihiko Noda, has said he will seek to reduce some expenditures outlined in the previous financial budget to set aside the necessary funds for reconstruction. However, he has not yet disclosed how big these possible cuts will be, or whether it will be necessary to issue additional government bonds to generate these funds. “We must make sure that the compensation is adequate, but we must also keep the financial burden on the public to a minimum,” Noda told reporters on May 11 (New York Times, May 12, 2011). If the issue of new bonds proves necessary, economists predict that rating agencies may decide to avoid taking immediate action, but a “downgrade” would be likely in June, when the government unveils its tax and social security plans. Indeed, there are wide concerns over Japan’s ability to repay any loans, given its already high public debt of over 200% of GDP, which as a result of the earthquake could reach 218% of GDP by the end of the year, according to the International Monetary Fund (IMF).
Furthermore, the weakness of the government and the political obstacles that have undermined past attempts by Prime Minister Kan Naoto to reform the financial system create more uncertainty. A further “downgrading” by international rating agencies, after that of February 22, 2011, after that of February 22, 2011, would certainly have a significant negative effect on the ability of the country to get out of the crisis.
For the moment, it is worth mentioning that the Bank of Japan (BCG) has injected more than $325 billion in the market in an attempt to temper the volatility of the financial markets and to prevent the deterioration of the country’s reputation in the eyes of the various local and international market actors who will take their money out from Japan if the risk level reaches a critical threshold. On March 14, the BCG has more than doubled its acquisition of assets from $61 billion to approximately $160 billion to buffer it against the impact of the earthquake and tsunami. In recent weeks members of the G7 have also had to intervene in the market in an attempt to slow the steady appreciation of the yen against the dollar.
In these circumstances, the challenge the government will face in the coming months is huge, but there are at least three reasons to believe that Japan can deal with this tragedy. First, situations of this magnitude are not new in Japan. Having learnt from the Kobe earthquake of 1995, for which the government was totally unprepared, Japan has been able to demonstrate greater efficiency and responsiveness. For example, part of the road infrastructure has been restored in less than a week. In addition, the army, together with the local communities, has quickly set about working to clear away rubble in the earthquake-affected areas. Second, unlike in 1995, the affected area is not heavily populated or greatly industrialized. According to the calculations of Nomura, one of the major industrial and financial conglomerate groupings of Japan, the three most affected prefectures (designation of regions in Japan), Miyagi, Iwate and Fukushima, contribute only 3.6% of Japan’s GDP, although the major Japanese electronics manufacturers are concentrated in this area. Third, given the recent history of disasters in Asia, the situation is not as bad as it sounds.
In the short to medium term Japan will experience a likely slowdown in growth, an increase in the national debt and economic decline. However, reconstruction efforts should lead to GDP growth, which will have a positive impact on the construction and infrastructure sectors. Even the breaks in the chain of international production should diminish within a reasonable time, preventing too great a loss of competitiveness for the country. Finally, Japan may exploit its geographical position by taking advantage of the exponential growth in other Asian markets, where demand for high technology products is expected to grow in the increasing number of families with an income of $10,000 or more. In recent years Japanese exports to Asian markets have increased dramatically. Indeed, 25% of Japanese exports are directed toward China, while exports to the U.S. now account now for only 15%.
Richard Rousseau, Ph.D. is a professor of international relations at the Azerbaijan Diplomatic Academy in Baku and a contributor to Global Brief, World Affairs in the 21st Century
