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Economic Impact
Cover Stories Series 2011> Aftermath of Earthquake in Japan> Economic Impact
UPDATED: March 29, 2011 NO. 13 MARCH 31, 2011
The Recovery Begins
Japan faces challenges as it begins to rebuild

Japan faces a tremendous challenge as it seeks to recover from the effects of the March 11 earthquake and tsunami. The most immediate challenge, of course, is the containment of radiation leaks from the damaged Fukushima nuclear plant. But ripples from the disaster will continue for some time, and Japan's recovery from the worst natural disaster in the nation's history will be costly and long.

The death toll is already far beyond the 1995 Kobe earthquake. The count continues as search and rescue teams scour the stricken northeastern coast for survivors. On March 20, an 80-year-old woman and her teenage grandson were found alive in the rubble of their home. But the current toll is expected to grow higher.

Japan is beginning to revive. Slowly, much-needed supplies are beginning to reach devastated areas as roads are reopened. Tokyo residents are adjusting to delayed trains, rolling blackouts, and national appeals to consumers not to stockpile food and water. Industry leaders are cooperating to manage shortages of goods and disruptions of the supply chain. Financial leaders around the globe met to facilitate Japan's intervention in the global currency markets.

Already, experts are debating the cost of rebuilding. The World Bank on March 21 estimated the amount at $230 billion, while the Japan Center for Economic Research produced a much lower estimate of 2 trillion yen ($24.6 billion). Despite the differences, experts agree this is likely to be the world's most expensive natural disaster.

In addition to the impact on infrastructure, the disaster will also have a major effect on the Japanese economy. The first impact, which has already been felt, is on Japan's industrial production. Interruptions in the supply chain have hurt some global Japanese manufacturers, including auto and semiconductor producers. Closure of major ports, airfields and roads has interrupted the flow of goods to and from Japan. Rolling blackouts beginning March 14 have also severely disrupted Japanese corporations and consumers.

Many Japanese business leaders are confident these temporary problems can be resolved by the end of the year. However, long-term challenges lie ahead.

One of the biggest long-term challenges is energy. Twenty-five percent of Japan's power generation capacity was knocked out by the disaster, including both conventional and nuclear power plants. Thus, to avoid massive blackouts, the Japanese Government and the Tokyo Electric Power Co. have instituted scheduled, rolling blackouts in the Kanto region—including Tokyo and seven neighboring prefectures.

Since power grids in eastern and western Japan are not connected, new power plants need to be built in eastern Japan. Alternatively, a new grid will need to be designed and built. In either case, solving the energy problem will be expensive and time-consuming.

Another problem is global confidence in Japan. Soon after the disaster, individual investors fled the Japanese market. Pressures on the yen also revealed a similarly panicky assessment of how the government was coping with the disaster.

But some say short-term jitters after the disaster, including how the nuclear crisis has been handled, is not evidence of long-term problems. Some economists, including the World Bank's Chief Economist Justin Yifu Lin and the Council on Foreign Relations' Sebastian Mallaby, said the stimulus effect of the recovery effort may boost the nation's overall economic performance in the next few years.

Despite this guarded optimism, Japan's challenges are still serious. In fact, its challenges have less to do with the yen and the cost of recovery, than with the social and political choices the Japanese need to make.

Can Japan's political leaders—both inside and outside government—unite to promote a sustained economic recovery, or will they resume their recent habit of quibbling over national priorities? Can Japan's normally hyper-competitive companies cooperate to increase industrial output? Can the Japanese consumer rally behind these efforts, putting diminished household savings behind the government's efforts? Will Japan's much-heralded capacity for energy conservation be sustainable over time?

People outside Japan also have responsibilities. Immediately after the disaster, many nations and organizations offered extensive support to Japan and people across the world were moved by the actions of the Japanese people. Finance ministers and central bank governors from the Group of Seven major industrialized countries pledged to collaborate in response to the skyrocketing yen. More international efforts will also be needed to ensure steady access to energy sources, and to provide capital, if necessary.

Finally, the global community must improve the safety of civilian nuclear power, based on lessons from the Fukushima nuclear crisis. China, as Japan's neighbor and friend, will play a particularly important role. Its cooperation will be vital to any global effort to help Japan.

The costs of this disaster are high, but the Japanese people seem up to the challenge of bearing these costs. At the same time, the United States and China should recognize the opportunity and responsibility for sharing in this recovery and rebuilding effort.

The author is a senior fellow for Japan studies with the Council on Foreign Relations in Washington, D.C.

(Viewpoints in this article do not necessarily represent those of Beijing Review)

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