April 17, 2011


Japan’s Crisis: Context and Outlook: Once, many observers thought Japan should be feared. Now, many fear that Japan should be pitied because natural disasters will accelerate its economic retreat. Perhaps the latter assessment will turn out to be as mistaken as the former. (Vaclav Smil, April 16, 2011, American)

A new study on sovereign fiscal responsibility (published by the Stanford Institute for Economic Policy Research) defined the fiscal space and fiscal path of 34 major economies—and put Japan in 31st place, just behind Ireland and ahead of Iceland, Portugal, and Greece. Japan—until recently the world’s second-largest economy, admired for its high-tech innovative drive and product quality and, in some views, even a presumptive heir to the U.S. global economic primacy—thus finds itself with a perilously diminished fiscal space on par with Portugal, with just five years left before it hits its maximum-feasible debt ceiling (for the United States, this point presently appears to be in 2027). Sovereign debt downgrading has already begun—in May 2009, Moody’s cut Japan’s rating from AAA to Aa2, and in January 2011 S&P posted an AA- rating (while the United States and Germany retain their AAA ratings). And the governor of Japan’s central bank keeps repeating the mantra of no country being able to run deficits forever. But, to put it bluntly, Japan for years has not had any government able to make significant decisions.

The country now resembles postwar Italy, with five prime ministers coming and going during the last five years, and, ironically, the tenure of the latest premier (in power since June 2010) was prolonged by the quake: Prime Minister Kan’s pre-quake favorability rating was only about 20 percent, he was under pressure (including from critics from his own party) to resign in the wake of illegal campaign donations, and the opposition was demanding an early new election—and it subsequently refused his invitation to join a new post-quake cabinet of national unity. Add to this frequent firings and resignations of key government ministers, and it is clear that the historic shift in September 2009 from more than a half-century of nearly-uninterrupted Liberal Democratic Party rule to control by the Democratic Party has brought neither improvements in policy clarity nor more resolute management of nation’s affairs.

What is ahead is a long and costly slog. Just to clear the seemingly endless fields of coastal debris in the two worst affected prefectures will take three to five years. New housing will have to be found or built for 150,000 people who now live scattered across 18 prefectures in more than 2,000 temporary shelters, and it is clear that some coastal settlements will not be rebuilt. It will take months to achieve stable cold shutdown at all Fukushima Dai-ichi station reactors and spent-fuel storage pools, to clear all radioactive debris from failed reactor cores and ruined storage pools, and to remove all radioactive water, while the complete unwinding of the disaster will take decades: the account books have yet to close on the Three Mile Island accident of far lesser magnitude-and-severity, 32 years later.

The aggregate long-term costs of coping with Fukushima station’s shutdown and (now inevitable) decommissioning remain highly uncertain, with a displaced population that has been removed from the roughly 1,000 square-kilometer formal exclusion zone around the plant, with radiological complications in international relations, and with reduced food production (Japan already imports two-thirds of its food, more than any other rich nation) from the contaminated area. Current estimates are that half of the 13,000 small farmers in the area may be at least temporarily excluded from the marketplace due to the combined impacts of farmland inundation and contamination of their produce. And what will Japan decide to do about its nuclear electricity generation capability? Before the quake it supplied about 30 percent of Japan’s electricity and was expected to grow to 50 percent within two decades, fractions so large that they cannot be replaced either rapidly or cheaply by any other available option, making a substantial retreat from nuclear power almost impossible to contemplate and a failure to continue with planned nuclear growth one fraught with major challenges.

The Japanese government has no choice with respect to taking on more public debt: it has already announced that it will nationalize all land abandoned by disaster victims, finance the region’s redevelopment (including construction of as many as 100,000 new residences), take a large stake in the financially troubled TEPCO (whose present market capitalization is barely 10 percent of its short-term-maturing debt, to say nothing of its possible liabilities), and indemnify farmers for their losses due to their contaminated rice fields, and fishermen for their similarly forgone catches. All this will obviously further constrict Japan’s fiscal space and truncate its already-short fiscal trajectory toward de facto shut-out from global capital markets.

A single generation ago, it appeared to many sober observers that Japan should be feared as it moved on a seemingly unstoppable track toward global economic domination. Today, many fear that Japan should be pitied as the greatest measured earthquake in the country’s history, compounded by an extraordinary tsunami and potentiated by a serious nuclear catastrophe, will accelerate the nation’s two-decade old economic retreat. My modest hope is that the latter assessment will turn out be as mistaken as was the former.

...so unless they were to use the crisis to radically alter the latter two the former will just keep following.

Posted by at April 17, 2011 7:33 AM

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