Facts and figures out of step with reality

PUBLISHED : Wednesday, 23 March, 2011, 12:00am
UPDATED : Wednesday, 23 March, 2011, 12:00am

Japan's economy minister, 72-year-old Kaoru Yosano, clad in his regulation ministerial 'Action Man' powder-blue boiler suit and heavy gumboots ready to spring into emergency mode, claimed last week that the damage to the country's economy from the earthquake and tsunami would be 'limited'.

He mused to the Financial Times that there could be a loss of perhaps 0.1 to 0.2 per cent of output, thus overall growth would be positive and 1.5 per cent in the 2011 fiscal year.

At the very least, Yosano was being economical with the economic truth. Indeed, it seemed a surreal comment when Japan is fighting to prevent a catastrophe leading to a nuclear meltdown. He failed to take account of the after-effects of the earthquake, tsunami and nuclear fallout, not to speak of the economic, social and political obstacles to putting the country on its feet again.

Even if you can forget the harrowing tales of life and death, the sight of half a million people shivering in temporary shelters, and another million households without power or running water, the triple disasters have shaken Japan to its core.

In the relative safety of Tokyo, 220 kilometres away from the epicentre, there are regular aftershocks making the population queasy, rolling power cuts that have shut much of Japan's manufacturing industry and reduced transport services by half. No wonder families nervous for their children's health and worrying about radiation have begun to leave Tokyo.

The discovery of unsafe levels of radiation in spinach and milk in the Fukushima area have not helped the nervous mood, even though the contamination was discovered before the food went on sale.

The ripples have extended beyond Japan's shores, proving that no island, however insular, is really alone in today's world. Japan's stock market went on a roller coaster ride, with billions of dollars wiped off the value of shares as nervous foreigners withdrew. The yen, perversely, rose to record highs of 76 to the US dollar, as Japanese brought back funds to help pay for the disasters, aided by speculators looking for a fast buck.

Only when the Group of Seven industrialised countries got their act together promising concerted currency intervention did the yen weaken to 81-82, still too high for most Japanese exporters, and the stock market gained 2.7 per cent on Friday, though it was still heavily down on the week.

Because industrial production lines and supply chains have become global, the effects of closures in Japanese factories are being felt as far away as the United States. Apple, General Motors and Ericsson are among global companies worried about disruptions to their assembly lines if the smooth processing of parts from Japanese factories is interrupted for more than a few weeks.

Global production lines are so finely calibrated with components moving just in time for the next stage that there is no plan B to set up new routes, certainly not by bypassing Japan, which is responsible for 30-50 per cent of critical items.

Yosano did his calculations by looking at the contribution of the most heavily affected areas to Japan's gross domestic product, just 4.1 per cent, but he ignored the damage that spread to neighbouring areas. The earthquake and tsunami destroyed or disrupted about 9.7 gigawatts, or 20 per cent, of Japan's nuclear generation capacity.

In addition, 12.5GW, or 7 per cent, of non-nuclear thermal capacity was knocked out. This includes crude oil, coal and liquefied natural gas. Refining capacity of up to 1.4 million barrels a day was also disrupted, or 32 per cent of Japan's total.

Continuing power cuts in Tokyo and the closure of vehicle and other factories throughout Japan testify to the spreading economic damage. Toyota loses production of 10,000 cars each day its plants are shut. If the closures last longer, or if continuing power cuts means that factories cannot produce full time, there will be threats to Japan's manufacturing platform, employment and the economy. Japan has already experienced hollowing out of its industry with production moving to China and neighbouring Asia, so it needs to get power and production running.

In spite of Japan's sophistication, restoring power is not simply a matter of adjusting the national electricity grid to divert more power to areas of shortage. When Japan's electricity system was started in the 1890s there was a major difference between Kanto, around Tokyo, which was set up using German technology, and Kansai, the greater Osaka area, using US technology, each on a different system. Compatibility is limited.

The most problematical issue in getting Japan on its feet again quickly is what may be termed 'animal spirits', the mood of the people at all levels. Unless and until the threat from the crippled Fukushima nuclear power complex is contained, the mood will be nervous.

Beyond Fukushima, there are reasons to be optimistic. The Japanese people have time and again shown their resilience. The mountainous landscape of Japan has few natural resources apart from the people, who created a prosperous and thriving society that was the envy of the rest of the world several times before, most notably from the ashes and nuclear dust of the second world war.

Some economists claim that reconstruction never adds to growth, but Japan will be trying to create a new and upgraded economy learning from the problems of the past. The economy has plenty of slack and the stock market is trading at a 10-year cyclical-adjusted price-earnings ratio of 15.4 times, against an expensive 37.7 times at the time of the Kobe earthquake in 1995. Indeed, the weekly Barron's cover declares 'Buy Japan Now' against a bright red sun.

The costs of reconstruction could be in the US$250 billion to US$300 billion range, up to three times the costs in 1995, and maybe 5 per cent of Japan's GDP. This would be manageable, if handled carefully politically. The 64 godzillion-dollar question is - can the animal spirits of the politicians cope with the disaster and its consequences?

One must be sanguine. Prime Minister Naoto Kan and his colleagues' pristinely pressed jump suits show no signs of sweat or dirt of the day. If the government wanted to show solidarity, senior ministers could have visited the victims, as well as learning some of the facts on the ground.

Japan already has the highest government debts in the world, 220 per cent of GDP, a budget heavily in deficit and is going through wholesale structural changes, including a rapidly ageing population which will add cripplingly to government health and welfare bills. Additional costs of rebuilding disaster areas will stretch the government imagination and its finances, and mishandled could be a tipping point for the cost of government borrowing.

Kan has suggested a grand coalition government to tackle the immense issues, but has found no takers. There are too many people who want him out and fancy his job and the perks of power. Until the politicians can get serious and understand the momentous issues facing Japan, there will be reasons to worry.

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