In Japan, the same old problems

Mega-disasters like Japan’s earthquake-tsunami are deadly and dramatic, but economists who study them are in near-total agreement: They don't cause much long-term economic damage, particularly in developed countries.

But in Japan, that rosy outlook comes with a caveat. A full recovery would leave Japan merely with the same gloomy economy it had in the first place, well before the northern coastline was flattened on March 11.

Macroeconomists who have studied big disasters around the world over the past decade have found that major economies are generally strong enough to perform a repair job. And in this case, the disaster spread across hundreds of miles, but it didn’t strike an economic center; the battered Tohoku region accounted for just 2.5 percent of Japan’s economic output.

But the world’s third-largest economy must now perform two repair jobs at once, reconstructing a coastline while also grappling with a shriveling population, a growing social-welfare burden and a massive sovereign debt. This latest disaster elongated the list of problems for an economy that already had too many.

“The economy’s long-term trend, fundamentally, doesn’t change,” said Kazumasa Oguro, a macroeconomist at Tokyo’s Hitotsubashi University.

But then Oguro added, “the basic trend before this was deterioration.”

Researchers who study disasters describe a two-step economic impact, with a short-term blow that is followed by a quick, neutralizing wave of private investment, new jobs and government spending.

That’s the pattern Japan saw when a 6.9-magnitude earthquake struck Kobe in January 1995. The industrial port city lost 6,400 people. Some 100,000 buildings collapsed. The country’s economy grew 1.9 percent that year, and in less than 1 1 / 2 years, Kobe’s industrial production had nearly returned to normal.

In the two months since the March double-disaster and nuclear emergency, Japan has endured only the first economic aftereffect, crystallized last week when the government announced that, between January and March, its economy contracted at a 3.7 percent annualized rate. That second consecutive quarter of shrinkage tipped Japan into a recession.

The news doubled as a shorthand for all that had happened since the earthquake. Some 200,000 jobs were lost as a result of evacuation and building destruction, according to one research firm. Toyota suspended all domestic production until April 17 and is now operating at just 50 percent of usual levels. Concerned about Japan’s disaster-vulnerable supply chain, some companies, such as Nippon Steel, drew up plans to expand operations overseas.

The country also faces long-term energy shortages resulting from the damaged Fukushima Daiichi plant and other shuttered nuclear plants. Forced blackouts appear unlikely, but businesses are being asked to conserve energy. To avoid peak electricity times, some automakers plan this summer to close their factories on Thursdays and Fridays — and keep them open on Saturdays and Sundays.

As reconstruction money flows into the disaster region, though, economists expect Japan to experience a period of growth, beginning in the third quarter. Japan’s economy minister, Kaoru Yosano, called the recession a “temporary phenomenon” and predicted that the economy will still expand 1 percent this year.

That jibes with recent research from Oguro and another economist, Motohiro Sato, who calculated that Japan’s disasters would actually boost the gross domestic product in 2011, flipping a 1.44 percent contraction into a 2.22 percent expansion. The pair’s research also suggests that Japan will see a year of slight inflation, rather than slight deflation that has nagged the country since the global financial crisis struck in 2008.

For Japan, however, the full economic legacy of this disaster will take years to unravel. Reconstruction will require Japan’s government — already with an unequaled gross-debt-to-GDP ratio of 225 percent — to explore tax hikes and other austerity measures, cutting spending and employee salaries.

The government will also have to borrow even more money, issuing bonds. Over the next five years, Japan will need to marshal some $250 billion for reconstruction. The country is not on the verge of a debt crisis, because some 95 percent of its bonds are domestically owned, but the demands of rebuilding could push Japan increasingly toward the foreign market.

According to the calculations of Oguro and Sato, Japan would have had a debt-to-GDP ratio of 301 percent by 2020 had the disaster never occurred. Now, they project a ratio of 309 percent.

“It might be slight,” Sato said, “but the probability of government bankruptcy will increase.”

Macroeconomists who study disasters also acknowledge one variable that research doesn’t account for: government competence. Prime Minister Naoto Kan faces calls to use the disaster as a catalyst for long-delayed reforms, such as raising taxes, liberalizing trade, deregulating the energy sector and modernizing the archaic farming and fishing industries. But all of these steps face pockets of vocal opposition from politically powerful interest groups, and a brief period of post-disaster political unity has already given way to bickering. With even some in his own party pushing for Kan’s resignation, the prime minister has little political muscle.

Though Japan’s parliament this month passed a $50 billion special budget, Japan will need several subsequent, and larger, special budgets to fund recovery in the disaster-hit area.

Kan’s government says the second budget could be ready by August.

But opposition parties, citing an urgency to deliver money to the battered region, want it to be ready by next month. Otherwise, they threaten, Kan will face a no-confidence vote. This could give Japan its seventh prime minister in six years.

“Japan is at a turning point,” Sato said. “What we need, ideally, is structural reform alongside reconstruction. But the other scenario is, there is no major reform. Then we will remain in a gloomy decade.”

Special correspondent Akiko Yamamoto contributed to this report.

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