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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
Japan's Crucial Moment
Hopes for the Japanese economy remain high despite the severe blow it has suffered

The tragic impact of the massive March 11 earthquake on the northeast coast of Japan has filled the newswires across the world. Those outside Japan have been impressed by the calm, dignified way in which the vast majority of the Japanese affected by this crisis have responded. Despite the earthquake's human toll—over 10,000 have died and more than 17,000 are still missing—the Japanese people have helped each other without panic, trying to quickly rebuild their lives and communities.

Japan remains the most vulnerable country in the world to earthquakes, and their impact on Japan's society and economy can be seen throughout history. As recently as 1995, Kobe was devastated by a large earthquake. Rebuilding the area required almost 2 percent of Japan's GDP. The recent earthquake is likely to be much more expensive. Furthermore, Japan's economy is even weaker than 16 years ago. Some people have estimated the rebuilding costs from the current quake at 5 percent of GDP. This does not include the incalculable cost in human suffering.

Japan is in a contradictory period of development. It remains a wealthy country, with a per-capita GDP of over $40,000. Yet government debt is high—over 200 percent of GDP. Japan's debt burden was the root of recent battles in the Japanese Diet over a new budget. One of Japan's great problems is its difficulty raising indirect taxes, such as consumption taxes on goods. Despite government debt, Japanese enterprises and banks are extremely healthy, with excellent balance sheets. Perhaps one positive impact of this horrible calamity will be to create the political will in Japan to raise taxes and reduce the deficit.

The construction sector will certainly be crucial to the country's economic recovery. After Japan's economic boom in the late 1970s and 1980s, the construction industry fell into a sustained depression despite huge government investment in infrastructure projects throughout the 1990s and into the 2000s. Rumors abounded that major construction companies colluded with the government to get support for these projects, many of which had limited long-term economic value.

The scale of the rebuilding needed in northeast Japan means the country's moribund construction sector will be revitalized, and will create economic activity critical to Japan's well-being. Airports, industrial plants and some ports on the coast near Sendai will need to be rebuilt, in addition to houses and roads. The investment required will be huge. Japanese construction firms will be busy for a few years, as they try to create structures that can better resist earthquakes and tsunamis, while completing the job as quickly as possible.

The most unexpected impact of the disaster, of course, has been on the Fukushima nuclear plant. The plant was built to withstand major shocks. However, the impact of the earthquake and tsunami crippled the reactors' cooling systems, causing fuel rods to overheat and release radiation particles. The Tokyo Electric Power Co., which owns the plant, has been trying to avert a total meltdown. The public's confidence in the nuclear industry, however, has suffered. For a country that gets one third of its energy from nuclear power, this is a major issue. Undoubtedly, the government will conduct an inquiry about the nuclear plant disaster in order to avoid a similar problem in the future. In the short term, global oil prices are likely to rise as Japan relies more on oil and less on nuclear power.

The immediate impact on the economy, of course, was also negative. The Tokyo Stock Exchange plummeted immediately after the disaster, forcing the Bank of Japan to pump massive amounts of liquidity into the national financial system to avert a run on Japanese stocks and a drop in the Japanese yen. It will take time—and government help—for confidence to return.

Japanese Prime Minister Naoto Kan said the recent disaster is the worst crisis Japan has faced since World War II. It is far worse than the two lengthy recessions the country has faced in the last two decades, including the one sparked by the global financial crisis of 2008.

The real challenge now for Japanese officials is to display leadership and unity. For many years, the turnover of Japanese prime ministers has been high. Over the last four years, Japan has had four prime ministers, with none lasting more than a year. Kan, previously a respected minister of finance, was challenged by Ichiro Ozawa for the top post last autumn, barely a few months after taking office.

Perhaps Japanese politicians can unite and assert leadership where it is crucially needed—in rebuilding devastated areas and holding powerful vested interests to account for mismanagement of the nuclear plant crisis. This is an important moment for Japan. The rest of the world, including China, has extended help and offered sympathy. Now Japan has two choices: to emerge from this tragedy stronger or weaker. I believe Japan will show its best side by reconstructing, recovering, and resuming its stature in the global economy.

The author is head of the Asia Program at Chatham House, London

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

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