Japan is, in fact, at a turning point. By galvanising public opinion, the disaster has given the government a chance to act boldly and responsibly. If successful in this regard, the DPJ might develop the internal discipline and leadership habits necessary finally to address the economic and financial problems that bulk so large on the horizon. But if Tokyo fails to address the crisis forcefully and effectively, Japan's outlook will grow even darker than it has been.
THE immediate effect of the Japanese catastrophe - the March 11 earthquake that unleashed a tsunami that damaged nuclear plants in Fukushima - has been to give new life to a government that was on the verge of collapse.
The ruling Democratic Party of Japan (DPJ) rose to power in the autumn of 2009 with a strong electoral mandate, ousting a Liberal Democratic Party (LDP) that had long maintained a stranglehold on the Japanese political system. Soon, however, the DPJ's mistakes in managing alliance negotiations with the United States, maritime quarrels with China and feckless economic policies sent the party's approval ratings spiralling downwards. After a series of scandals within the upper reaches of the DPJ as well as the government's failure to pass in a timely fashion the enabling legislation necessary to effectuate the budget for fiscal 2011 (which begins in two weeks), Prime Minister Naoto Kan appeared doomed.
The current crisis has given the Prime Minister a second chance. With thousands of confirmed deaths, some 15,000 persons missing, hundreds of thousands displaced, and several nuclear reactors on the brink of meltdown, this is no time for a change of government. Mr Kan has made reasonably good use of this 'rally round the flag' moment, establishing a national crisis management centre and dispatching ministers and other staff to deal with various problems. It is still too early to say that he has done enough, but he seems to have improved upon his predecessors' performance after the Kobe earthquake that took more than 6,000 lives in 1995. Rather than proudly rejecting offers of foreign assistance, for example, he quickly accepted all offers of aid, mobilised the military for rescue operations, and appeared frequently on television to calm a nervous public.
Due both to the magnitude of the disaster and to Mr Kan's relatively firm leadership, the opposition has likewise adjusted its position, edging towards a more conciliatory stance on several major issues. Mr Sadakazu Tanigaki, the head of the LDP, and other opposition leaders have thus declared their desire to work together in the formulation and passage of an emergency spending package. The ambit of this new cooperation will probably expand to include the regular budget as well, enabling Mr Kan to obtain Diet approval for the aforementioned enabling legislation. The Prime Minister and his party may therefore succeed in gaining several more months of time in which to rebuild their reputation and power - assuming, naturally, that the trouble at the Fukushima nuclear facility ends without producing yet another catastrophe. But with that caveat, this second opportunity for the DPJ is the silver lining on a very dark cloud.
The economic effects of the disaster vary, depending on one's time horizon. As attested by the sharp falls in Japanese equity prices, the short-term impact is decidedly negative. Not only have vast tracts of real estate and productive capacity been lost, but much of the transport and energy infrastructure has been destroyed. The major car manufacturers have already curtailed their production levels, and, at the behest of the government, steel companies and electronics manufacturers have voluntarily reduced their operations in order to conserve energy.
Along with officially orchestrated rolling blackouts, these decisions will inevitably engender shortages of various goods and services. Depending on how severe the nuclear problem turns out to be, the rate of gross domestic product (GDP) growth could fall well into negative territory during the second and perhaps third quarters of 2011. Yen appreciation could exacerbate this dynamic as Japanese companies repatriate overseas investment capital in order to support domestic reconstruction, but the central bank has already loosened monetary policy so aggressively as to countervail this danger and could, in conjunction with the Ministry of Finance, intervene massively in the foreign exchange markets if necessary.
Over the longer term, however, the crisis could prove a boon. Recall that Japan has suffered more than two decades of low or no growth due primarily to excess savings and inadequate demand. The only time during this period in which the economy grew reasonably strongly was in the aftermath of the 1995 Kobe earthquake, when the need to rebuild vast swathes of residential and industrial properties propelled government and corporate spending upward and produced a surge in GDP growth that lasted into early 1997. Assuming again that the nuclear element of the present crisis does not worsen much further, the exigencies of reconstruction should make a similarly big contribution to the economy in late 2011 and 2012.
Looking a bit further into the future, however, the disaster and reconstruction will almost certainly exercise a malign influence over Japan's national finances. With the gross national debt already approaching 200 per cent of GDP, ratings agencies concluded that the risk of a financial crisis was increasing substantially and therefore downgraded Japanese government debt. Even before the disaster in Sendai, Tokyo knew it must quickly address this problem by closing the budget deficit and beginning to pay down its obligations. A raise in the consumption tax and other duties thus was under consideration.
Now, however, fiscal reform will be impossible. The DPJ and the LDP are discussing the adoption of an emergency tax, but this would be only a temporary expedient and presumably not large enough to offset the greater expenditures on disaster relief and reconstruction. The net effect will be to delay significant progress on fiscal consolidation for at least another couple of years, leaving the country to resolve a bigger debt problem with an older workforce, less surplus capital, and a greater probability of failure.
In this sense, this natural disaster could ultimately contribute to a financial debacle comparable in scale to perhaps the 1997-1998 East Asian crisis or the implosion of the technology bubble a decade ago.
If the domestic implications of the disaster are mixed, its international import will be more uniformly negative. In the short run, the interruption of normal commercial activity in Japan will reduce global demand and hence tip the balance away from global price inflation and towards deflation. This effect may well be amplified by capital movements: Upward pressure on US interest rates due to the outflow of Japanese funds could be overwhelmed by inflows of money seeking a safe harbour in the present storms. The cost of capital in American markets could therefore fall rather than rise, effectively perpetuating the abnormal conditions that ensued from the 2008-2009 global financial crisis.
Over time, however, the world will assuredly see greater inflationary momentum in the prices of specific goods and services. The decision by China and other developing countries in late 2008 and 2009 to expand public works spending in reaction to the global slowdown was already driving up the prices of concrete, ferrous metals, rare-earth elements, wood, simple electronics and the other goods required for infrastructure projects. Canada, Australia, parts of Africa and Latin America, and the oil-producing countries all benefited from these trends. The more forceful entry of Japan into these markets will reinforce this pattern over the medium term, underscoring the inflationary bias that was starting to unsettle central bankers in the months before the Japanese disasters.
A more extreme version of the same pattern will likely unfold in oil markets, where rapid growth in the largest developing markets and continuing instability in the Arab world caused prices to spike upward in late 2010 and early 2011. The trouble at the Fukushima reactors, which has discredited a source of energy to which the whole world was turning, will only accelerate this process.
Since the Sendai earthquake, France, Germany and Switzerland have announced their intentions to reconsider their nuclear energy plans; many other nations will likely follow suit. The problem is that at present, the only alternatives that are both economically feasible and capable of rapid expansion are hydrocarbons. In this sense, bad news for Japan is also bad news for the global environment.
The loss of so much Japanese wealth, productive capacity, financial resilience, and national confidence will, over the longer term, accelerate China's rise relative to Japan. Beijing's sagacious gestures of goodwill cannot obviate - and may be intended in part to conceal - this unnerving reality. Also worrisome is the greater influence that the world's disenchantment with nuclear power will bring to the oil-rich countries. A country so dependent on imported energy as Japan cannot look upon this development with equanimity; and the United States and Europe will surely regret anything that empowers such difficult interlocutors as Iran. Managing these profound changes in the global balance of power will require not just closer bilateral relations but stronger and more strategic leadership than either Washington or Tokyo have manifested in recent years.
Japan is, in fact, at a turning point. By galvanising public opinion, the disaster has given the government a chance to act boldly and responsibly. If successful in this regard, the DPJ might develop the internal discipline and leadership habits necessary finally to address the economic and financial problems that bulk so large on the horizon.
But if Tokyo fails to address the crisis forcefully and effectively, Japan's outlook will grow even darker than it has been. In that event, the country will emerge from this disaster with its international powers curtailed, its confidence impaired, and its finances further damaged. The tendency of the world to view Japan as a spent force would thus be confirmed and the country left to await the eventual onset of a financial crisis that finally resolves its fiscal and financial problems.
By Robert Madsen & Richard J. Samuels
The writers are respectively senior fellow and director at the Centre for International Studies at MIT (Massachusetts Institute of Technology)
Reproduced with permission from Foreign Policy, www.foreignpolicy.com
© The Washington Post
