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Prospects for the Japanese Economy’s Recovery

Wednesday, April 20, 2011 - 09:06

On 11 March, 2011 Japan experienced one of the strongest ever recorded earthquakes of 9.0-magnitude on the Richter scale. Stronger than this one were only the earthquakes in Sumatra in 2004 and in Chile back in 1960. A tide of 3 to 10 meters struck the northeastern coast of “The Land of the Rising Sun”, killing more than 11 thousand people. This was one of the greatest disasters of mankind. The strength of earthquake shocks and tsunami wave height were close to the maximum values, but the number of victims for such powerful natural disaster was relatively small. For comparison, 220 to 230 thousand people died during a minor earthquake of 7 points in Haiti last year. Approximately the same number of victims was after the earthquake near the island of Sumatra in 2004. The accident at nuclear power plants of the country and, above all, the danger of radioactive contamination at nuclear power plants "Fukushima-1" caused extra headache for the government.
Consequences of the earthquake and tsunami led to a breach of the infrastructure of several prefectures, fires, destructions of residential and industrial buildings, ports and airport in the city of Sendai. As a result, a significant number of companies stopped, insurance companies faced the need to pay huge sums of compensation, which amounts about $ 33 billion only to private individuals. This led to a collapse of quotations of insurers in Japan. Direct damage to the economy of the country, according to the World Bank, is estimated at $ 235 billion or 4% of GDP. $ 12 billion are required only to restore the damaged infrastructure.
Also all these damages set the stage for a new growth of the building sector. Moreover, the expectations of millions of contracts caused rapid growth in stock prices of construction companies, and attracted a significant number of foreign investors to the country. Practice shows that the restoration of damaged areas contributed to the revitalization of the economy and created working places. The same was during the devastating earthquake in Japan in 1995, when the tsunami wave completely destroyed the city of Kobe - the world's sixth-largest seaport. More than 5 thousand people died then. But the city was almost restored for the year and a half, and the growth of the Japanese economy was about 3.5%.
But this year, the earthquake and tsunami were followed by the crisis in the country's nuclear power plants. This caused even more damage to the economic situation of the country. Problems with power supply resulted in a temporary suspension of leading corporations around the country. Decrease in electricity generation was a direct consequence of accidents at several nuclear power plants. And famous plants, "Fukushima-1" and "Fukushima-2", as you can see in Fig. 1, were the most powerful producers of the electricity in Japan. Stoppage of enterprises of the country's leading corporations led to a significant revenue loss. For example, on average about 37,2 thousand of cars were produced per day in the country before the earthquake. It is easy to calculate that a fortnight’s downtime of business turned into a multibillion losses.
Announcement of the government, of the IAEA and of senior officials of foreign countries about the detection of radiation outside the plant "Fukushima-1", their predictions for the future directly affects the dynamics of the Japanese economy. Thus, the Japanese Nikkei stock index was reducing rapidly in the day of the tragedy on March 11. A threat of radioactive contamination of vast territories had even greater impact on the situation. It led to the panic among foreign and local businessmen, which led to the "collapse" of Japanese exchange. Only the timely actions of the Central Bank of Japan could significantly add optimism to investors and liquidated the threat of capital escape from the country. Allocation of a record $ 217 billion U.S. dollars on March 15 on maintenance of the economy convinced investors of the profitability of investing in the country. As a result, on March 16 Nikkei rose 5.68% (Fig. 2).

Nikkei decline for 17, 23 and 28 March is explained by the reports about increased background radiation around the nuclear power plants "Fukushima-1". Thus, this situation around the nuclear power plant accident is the main brake on the development of Japanese economy today.
In this situation, it is encouraging that for more than a fortnight, the fuel rods on the nuclear power plant lost more than a third of its original energy, which makes them less dangerous. Most likely, everything goes to the slow decay of the process. The situation similar to the Chernobyl disaster is ruled out on the Japanese reactors. In Chernobyl there were burning graphite rods, in the Japanese reactor cooling system works using water instead of graphite, so there is nothing burning inside the reactor.
In modern history, there is an example of the accident at nuclear power plants of the same type as "Fukushima-1". This was the emergency situation at the nuclear power plant Three Mile Island in the U.S. in 1979. Both facilities were built on similar technology and both cooling systems denied and the depressurization of the reactor was registered. American emergency reactor was cooling for about a month. At that time the mass radioactive contamination was avoided, although the leakage of radioactive water was detected. Let’s hope that this time massive release of radioactive substances into the environment won’t happen. The discovery of radioactive substances in the air and water near the "Fukushima-1" can be easily explained by the fact that while cooling the damaged reactor with sea water from helicopters, certain contamination of water and steam is inevitable.
The Prime Minister of Japan, Naoto Kan, said on March 29 that the situation at the NPP is uncontrolled. These words caused the beginning of the action on the temporary nationalization of the operator of NPP "Fukushima-1" the company called Tokyo Electric Power Company. Complaints about the work on the accident-related power plant also occurred in the past, when the head of government criticized the company's management for the incomplete provision of information and for not very logical evacuation of personnel from the accident-related facility. The company itself doesn’t have a good reputation. In 2002 its director and 6 more leaders were forced to resign because of the revealed forgery of reporting on the results of the repair and technical inspections on the stations. And the fact of hiding the information about the discharge of radioactive water into the sea in the issue of the earthquake was detected in 2007. Then the operator station tried to pass it off as "a small fire without consequences for the background radiation." It is believed that the establishment of more stringent control by the government will improve the situation at the NPP.
As for the situation concerning the lack of electricity it should be recognized that the country is gradually able to overcome the energy crisis, which is evidenced by a statement of Tokyo Power Company TEPCO on March 27 about the denial of rotational power cutoffs in the capital, because power companies can now meet the needs of their subscribers. And it happened despite the fact that the country has already run industrial enterprises, and a routine production output began.
Stoppage of the Japanese industry because of the disaster reduced production of cars and microelectronics in the U.S. and Western Europe on average for 13%. Lack of components and spare parts led to the depletion of reserves of car and electronic manufacturers. Now the factories in Japan try to satisfy the demand for their products of global corporations. Existing deficit will keep Japanese industry occupied with orders for a long time.
Special hopes on a quick economic recovery should be expected from the construction sector. The government counts on the most rapid rate of construction. Thus, $ 218 billion that was selected by the Central Bank of Japan to support the economy allowed reducing the interest rate on loans to almost zero. In addition, almost all banks in the affected prefectures provided their clients with the opportunity to get loans just "on parole". They announced that they are ready to give money to people with a passport or a driver's license. Many people fleeing from the tsunami didn’t take their documents. For them, this solution of banks gives an opportunity to restore their houses and property quickly.
No doubt almost all victims will express the desire to get such accessible and cheap credits. And if so, then the population will have large amount of cash, which can help to pay for construction of houses and for buying household appliances. It’s thought to be a major stimulus for economic recovery.
This and last year the economic slowdown was directly related to the gradual decline in demand. Appreciation of the national currency, which occurred from time to time, caused the prices decline. And this led to the fact that the thrifty Japanese refused purchases, especially the expensive ones and expected the next price reduction. Thus, the demand was generally falling, which led to a crisis of overproduction. The current tragedy together with the timely actions of the government for lending for the victims created a huge potential for the boom of the construction industry and for the growth of mass consumption.
As for the external economic relations then Japan's position was somehow undermined by the reports about the radiation emissions. Thus, Russia refused to import fish caught in the waters of Japan. Strong criticism from the U.S. is troubling. America tends to consider the situation in a very pessimistic scenario, calling the attempts of Japanese services to cool the reactor as "desperate", placing their Navy ships off the coast, supposedly because of the threat of radiation emission, reporting that the radioactive particles have reached California. The mass media of other countries keeps up with the U.S., but the United States stand out against this background. If there are new radiation emissions in the future, it can lead to the closure of the world markets for goods from Japan. This is one of the most pessimistic scenarios.
Strengthening of yen against other currencies of the world also creates additional obstacles for the development of the Japanese economy; as a result products in foreign markets will become more expensive and therefore less attractive. On March 18 leaders of the countries of «G7» agreed to sell the yen jointly to prevent further deflation. These measures were successful for the Japanese economy, reducing the value of its national currency for a specified period. At the moment it is also becoming cheaper.
An additional barrier that affects Japan right now is an oil price increase on world markets because of the unstable situation in the Arab world. This problem is connected with the prospects of nuclear energy in general. Decision on mass construction of nuclear power plants was taken by Japanese authorities in connection with the global oil prices increase in 1973 and 1979-1980. Now the part of nuclear power plants in the country's energy budget is around 29,3%. Gradual increase of their number was planned. But because of the accidents at nuclear power plants the government's plans were seriously criticized. And indeed, the increased seismic instability of the Japanese islands and the risk of tsunamis are unfavorable factors for the construction of nuclear plants. But if the government takes the path of development of traditional and not so dangerous power plants, it will lead to the increased consumption of oil and coal, and as a consequence to the rise in prices. Consequently, such option is unacceptable for the Japanese economy.
If to compare the accidents in Japan in 1995 and in 2011, we can see that the current disaster significantly exceeds the one happened with the city of Kobe by the number of victims and by the force of impact of the disaster. But it is also important that the current state of the Japanese economy is worse than in 1995.

Figure 3 shows that at that time the Japanese economy was at the point of 20 thousand, and decreased to 14 thousand. In a year, it surpassed the previous index, rising up to 22,5 thousand. Before the earthquake on March 11, 2011 the economic system of Japan was only around 10 thousand points. Only timely actions of the Central Bank of Japan saved the situation.
From this comparison we can see that the full restoration of the country's economic system will take much longer than in 1995-1996. If at that time they managed to regain lost position for a year and a half, then in the current situation it would be possible only in two or three years.

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