|Detail from Nikmak's "Japan is Arising". Via.|
Two months after the devastating earthquake and tsunami, which unleashed a nuclear crisis in the Tohoku region of Japan, the enormity and complexity of the problems the country now faces are daunting. More than 14,000 people lost their lives and nearly 200,000 have been evacuated from the region and remain in emergency shelters. The Japanese government now estimates that the cost of the damage could reach $310 billion.
In a discussion on Japan’s prospects after the Tohoku earthquake entitled Why Japan May Surprise the World: Rebirth after the Tohoku Quake?, a panel of leading economists at Japan Society did not sugar coat the challenges the country must now overcome. “It will have a pretty darn big effect on GDP,” said Bruce Kasman, Chief Economist at JP Morgan. The panel however, said the economic outlook for Japan, like the people, shows signs of resilience.
The immediate impact of the disaster was serious said Bruce Kasman, with a 15% drop in production in March. Retail sales fell 8% and car sales were down 40% for March and April. Overall he estimated a drop of 4% of GDP on an annualized basis over the second and third quarters of this year. But he predicted that after all the “sound and fury” had died down, Japan would be back at 90% of production capacity by the end of the summer and back on a growth path by the end of the year in part because of fiscal stimulus programs launched in response to the quake.
Paul Sheard, Global Chief Economist with Nomura said the quake had been a huge blow to Japan’s national confidence. Many had been waiting for the next “big one” to strike Tokyo or Tokai not Tohoku. The result was that many now feel another earthquake could still hit elsewhere. However, he suggested the negative impact of the crisis could also have a positive outcome. While the supply chain disruption caused by the earthquake, could lead companies to shift production offshore, it also reminded the rest of the world just how crucial Japan’s technology sector is to the global economy. Reconstruction not just by the government but also by the private sector looking to protect its own infrastructure from future disasters, could create a major economic boost for Japan. He estimated that while GDP would shrink by 0.5% this year, next year Japan’s economy would grow by 3.1%.
The panel saw the crisis as an opportunity for Japan to address some hard questions. Mr Sheard said now was the time for Japan to grapple aggressively with its deflation perhaps by issuing bonds. He also recommended that Japan look at its immigration policy in the face of its ageing society. He said opposition to immigration might diminish and the government should draw up a new structured, strategic immigration plan. It is also a time when strong leadership and continuity would be essential, he said.
The impact of the earthquake will have ramifications in all sectors of the economy but Kyohei Morita, Barclays Capital Chief Japan Economist, felt that problems the economy is facing were there long before the earthquake struck. He predicted that while Japan now enjoys a healthy current account surplus, the ageing society and an outdated tax policy which relies too heavily on corporate tax, will mean that the surplus disappears by 2018. "A current-account deficit would change completely the way the Japanese economy looks," he said. Companies facing expensive power supply and a weaker yen could take their business overseas resulting in what he described as “hollowing out” of the economy. Mr. Morita said that the nuclear crisis would spark a debate in the near term about electricity production in Japan. He said use could be made of thermal and hydroelectric power but in his opinion it would be “impossible” to shift way from nuclear power completely.
Much has been made of the reduced capacity for electricity production with predictions of a shortfall of 20% by the summer months. But the panel felt this was being overplayed and that Japan would rise to the challenge and find ways to make sure that power could stay switched on.
The panel agreed that there was much to overcome and that strong policy initiatives would be essential to Japan’s success. Jeffrey Shafer, a former Citigroup executive, who chaired the event, said the panel had pointed out some gloomy realities but that there was “optimism and hope glimmers”.
Hindell was BBC Tokyo bureau chief and Daily Telegraph Tokyo correspondent and is now based in New York.