Friday, March 25, 2011

"Japan - Beyond the Personal Tragedy, a Blow to the Economy"

Sydney M. Williams

Thought of the Day
“Japan – Beyond the Personal Tragedy, a Blow to the Economy”
March 25, 2011

Aside from the devastating personal disaster the Japanese experienced on that Friday afternoon two weeks ago, their nation faces a rebuilding which is estimated to cost, according to the World Bank, between $122 billion and $235 billion. Since the full magnitude of the damage has not yet been determined, it is likely the final costs will exceed the high estimate. Indeed, other estimates have the costs exceeding $300 billion.

Japan, with a $5.1 trillion economy, represents about 8.5% of global GDP. Their public debt is roughly equal to 200% of GDP, the highest ratio among developed nations. A year ago, Finance Minister Yoshihiko Noda offered a plan to pay down debt. That will not happen, at least not in the foreseeable future. Assuming the high end of the World Bank’s estimates, reconstruction will cost about five percent of GDP. The IMF had estimated Japan’s economy to grow 3% this year. Preliminary estimates have reduced that growth by 1%. Bond issuance for purposes of relief and rebuilding will rise, and tax revenues will fall. The deficit will worsen.

The greater Tokyo area, according to Stratfor, is receiving about 33 gigawatts of generating capacity versus normal peak demand needs of 45 gigawatts, suggesting that the greater Tokyo area is looking at prolonged rotating blackouts for the next couple of months. Japan generates about 30% of their electric power from nuclear. A former trade negotiator tapped by the government to deal with the Fukushima nuclear crisis, Kiichi Hidehiko, said that Japan has set a goal of increasing the amount of electricity generated by nuclear to 40% by 2020. Japan has no alternative. They have no native natural resources; they are dependent on the Middle East for oil, Australia for coal and gas from places like Papua New Guinea. Nevertheless, brakes on existing facilities are likely to be applied. Industrial production will be in retreat, at least for a few months.

Fear of radiation has scared both Japanese citizens and foreign workers. Japanese officials have said that all people living within 12 miles of the Fukushima Daiichi plant should be evacuated, and that anyone within 18 miles of the site should stay indoors. U.S. citizens living within 50 miles of the site have been evacuated. Water, milk, spinach and other food products have been singled out as exceeding some government radiation standards. In terms of water, on Tuesday the Japanese government said it had detected 210 becquerels per kilogram of iodine-131 in one sample. A sample from a second site gathered the same day showed 32 becquerels; on Wednesday, though, the sample dropped to zero. The government limit for infants is 100 becquerels per kilogram. However, the broad limit for all others is 300, far more stringent than the international level of 3000 becquerels per kilogram. Iodine-131 has a half-life of roughly a week, suggesting levels would fade if new radioactive material is not added. It does not seem to me, at this point, to be a high risk problem.

On Wednesday, the government reported that radiation levels in downtown Tokyo on Wednesday stood at 0.146 microsieverts an hour, versus the normal level of 0.035. To put that number in perspective, a typical chest X-ray exposes a patient to 100 microsieverts. In New York City, the normal rate is 0.11 microsieverts per hour. A typical airliner flying at 37,000 feet exposes the passengers to about 5.5 microsieverts per hour. Again, I am no expert, but from what I have read the risks of radiation don’t appear to pose a serious long term threat.

The problem for Japan will be recovering from a devastating natural disaster that, as of Thursday evening, has taken (killed or missing) 27,352 lives, and destroyed several towns and villages. Two towns that disappeared – Minamisanriku and Kesennuma – were bustling seaports, each with several thousand inhabitants. Today, both lie beneath a sea of mud. Sendai, a city of a million, was hit by a thirty-foot Tsunami. The northeast part of Japan is home to a number of manufacturing plants, whose destruction or simply temporary loss of power will impact auto and technology companies (among others) in the U.S. and other countries. Out of fourteen million autos produced in Japan in 2010, nine million were shipped overseas. Nine of Sony’s twenty-five plants in Japan have been idled temporarily or partially suspended production.

On the other hand, Japan has one of the highest household savings rate in the world. Their savings, estimated at over $17 trillion (or about $130,000 per person) dwarfs on a per capita basis that of the United States – about $60 trillion, or a little less than $20,000 per capita.

What’s past is prelude, as Shakespeare wrote, and Japan has a history of recovering from disaster faster than most expect. The city of Tokyo was flattened in the 1923 Kanto earthquake and 140,000 died. The city was rebuilt, only to be destroyed twenty-two years later. Again, it was rebuilt and within twenty-three years Japan had become the world’s second largest economy. They are a resilient people and should not be underestimated in the determination and speed with which they will rebuild.

But the longer term problem for Japan is its declining and aging population – and that may render comparisons with the past mute. Over the past one hundred years Japan’s population has risen 150%. Over the past ten years it rose 0.2%. Nobody expects Japan’s population to double again. Of the 128 million Japanese, 29.4 million are over 65. (And more than 44 thousand are over 100.) Those facts will impact savings and trade balances. Japan is the world’s largest creditor nation with net external assets of about $1.7 trillion, according to a Reuters report dated March 17, 2011. However, their aging population is forcing a drawing down of their savings. In January 2010, Kiichi Tokuoka of the IMF suggested that by 2015-2020 public debt will exceed household gross financial assets. Overseas buyers of Japanese debt will likely demand higher interest rates and risks putting their credit ratings at risk.

In the shorter term, though, Japan has the wherewithal to pay for reconstruction, but there seems little question that domestic GDP will be impacted. The effect on global GDP, however, while having a negative bias should not be too meaningful. It is the longer term that bears watching.

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