It would be grotesque to say that Friday’s earthquake and tsunami are anything but a catastrophe for Japan. We still have little sense of the total number of people killed, or the full extent of the damage, or when the nuclear plants will be stable. As a human disaster, it is still overwhelming.
But Japan may be able to turn some of it to its advantage. In particular, the crisis may bolster Naoto Kan, a good but vulnerable prime minister who has shown more determination to fix Japan’s serious problems than any of his predecessors for years.
It is obvious why many fear that this quake will only add to those problems. Predictions of trouble began with a plunge in manufacturing output. Car manufacturers have announced that they are shutting down production at key plants. Analysts have predicted that Japan’s “just in time” production could now be a handicap, depriving those factories that are still working of crucial parts. The northeast region of Tohoku accounts for about 8 per cent of GDP, compared with the 4 per cent generated by Kobe, the site of the 1995 earthquake.
Even before Friday, Japanese manufacturers were facing rising oil prices and uncertain global demand; those problems remain. The economy had already contracted in the last quarter of last year. A further worry is that national debt is about 200 per cent of GDP. If the Government adds to it, to pay for reconstruction, that could make markets much less keen on holding Japanese debt, some warn.
Another threat, some have predicted this weekend, is that the yen will rise, as it did after the Kobe earthquake. The 1995 disaster killed 6,000 people and caused damage equal to an estimated 2 per cent of GDP. While the Nikkei index slid over the months after that shock, the yen soared by a fifth, buoyed by the repatriation of funds invested abroad, and helped by the Bank of Japan’s decision to keep monetary policy slack. This time, the currency has already leapt, after an initial dip, in response to predictions that funds invested abroad will be repatriated in a similar way. Jim O’Neill, the chairman of Goldman Sachs Asset Management, has warned that the last thing that Japan needs is a higher yen.
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Yet these fears, while understandable, may be overdone. Many analysts speculate that manufacturing has considerable spare capacity, partly because output is still well below levels before the global financial turmoil, even though last year’s growth, until the final quarter, was strong. The effect on output may be much smaller than the damage would suggest, they conclude.
Fears of a rise in debt triggering a debt crisis are reasonable — this ranks among Japan’s most intractable problems — but are, perhaps, still premature. There have been predictions for years that Japanese savers’ famous appetite for buying their own government’s debt will expire as the population ages. That is surely right, at some point, and yet Japan seems for the moment not to have reached that point.
Alarm about a rising yen also looks overstated, given the concerns about debt, and the likelihood that the Government will fund the repairs from the issue of more bonds. It may even have to embark on another tranche of quantitative easing, just as the United States appears to be completing its last round, and US and European interest rates appear likely to rise. The Bank of Japan has said that it will shorten a two-day policy meeting, beginning this morning, to one day, in an attempt to give the markets more clarity.
The single most helpful effect of this crisis may be in shoring up the Government’s position. Until Friday, Naoto Kan was locked in a budget stalemate with opposition leaders. Mr Kan, previously the Finance Minister, has shown himself to be clear-sighted about the deep-seated problems affecting Japan’s economy, from the worsening debt position to the cost of supporting an ageing population, to the persistent threat of deflation. Yet he has been unable to tackle them or even to secure this budget because of the weakness of his Government following the resignation of his Foreign Minister, and his admission that he accepted illegal foreign donations to his campaign. Many speculated that he was on his way out. That may now change; the opposition now apparently feels obliged to be seen to join forces.
If that brought some stability to Japan’s turbulent politics, it would be a hugely important step for the country. Dealing with its worst economic problems, above all the debt, will take a more far-sighted and stable government than it has produced in the past decade. It is just possible that this disaster will help to do that.
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Bronwen Maddox is Editor of Prospect magazine.