Jensen

Tuesday, June 21, 2011

Experts: Quick Japanese Economic Recovery From Disaster Likely

Despite the destruction wrought by the March 11 Japanese earthquake, tsunami and ongoing nuclear catastrophe caused by it, Japan's economy is likely to recover quickly and while challenges loom, the disaster could provide the island nation with a major opportunity to re-invest and re-innovate key sectors of its economy.

In addition, the disaster has rekindled American economic, leadership and public interest in Japan, offering a chance for both Japan and the United States to strengthen ties in their more than 60-year-old bilateral alliance.

These were the messages delivered by a panel of experts to nearly 100 business leaders gathered for a symposium on Japan's impact on the Southern California economy hosted by the Japan America Society of Southern California at the InterContinental Los Angeles Century City Hotel on June 7.

Although titled "Japan Matters: Japan’s Positive Impact on the Southern California Economy,” the symposium's five-member panel of experts spent much of their time talking about the impacts to the Japanese economy from the March 11 Tōhoku earthquake, tsunami and subsequent meltdown of the Fukushima nuclear power plant's four reactors.

"It is too early to come to a full assessment on the impact of the earthquake on Japan's society and Japan's direction with the world, but I think that I can at least say that the earthquake and tsunami demonstrate the importance of mutual dependence between Japan and other countries throughout the world," Japanese Consul General in Los Angeles Junichi Ihara said.

This interdependence, Ihara said, presented itself clearly in the global disruptions caused by the disaster, most notably in the auto industry.

"We discovered that small factories in the Tōhoku region produce, for instance, 70 percent of a very important brake parts for automobiles. Also, some small factories in the Tōhoku region make a very special paint that is used for coating expensive cars in the United States," Ihara said.

"Although the three affected prefectures' combined GDP only represents 4 percent of total Japanese GDP, there are factories in the Tōhoku region that are key parts of very important supply chains."

Panelist Edward Lincoln, Director at the Center for Japan-US Business & Economic Studies at New York University Sterns School of Business said that when you have Japanese factories that are key nodes on larger supply chains, "this of course effects other Japanese companies more directly than it effects, say, American companies in the US But, in fact, it has effected American firms and European firms and Chinese firms because of these instances where there is some critical component that just happens to come from a [Japanese] factory that suffered some damage."

Another place where this interdependence has been visible, according to Ihara, is in the mutual aid shared between Japan and the United States.

"In the Los Angeles area we are so grateful to so many individuals, organizations and communities for their generosity. In particular some local ethic communities have made great efforts to raise money for the support of Japanese victims," Ihara said.

"I was curious why they were so kind and helpful. When I asked them, they said 'Well, Japan helped our country when we had natural disasters, sending emergency supplies or rescue teams.' So, I realized that after World War II, Japan has made a lot of contributions to the development of other countries and we are now very well connected to many countries. We are living in that interdependent and interconnected world."

Another example of this mutual cooperation and interdependence cited by several panelists is Operation Tomodashi, the US military's efforts to assist Japan in the aftermath of the Tōhoku disaster.

Panel moderator Daniel Bob, director for US–Japan Programs at the Sasakawa Peace Foundation USA, said Operation Tomodashi is an "important manifestation of the depth of the bilateral relationship between the US and Japan."

Ihara pointed out that Operation Tomodashi is the largest joint and combined operation between the US Military and the Japanese Self-Defense Forces (JDSF) in the history of the bilateral alliance.

Working alongside the 100,000 JSDF members, Ihara said that the US forces of Operation Tomodashi includes, "20,000 US sailors and marines, 160 aircraft and twenty naval ships including the [aircraft carrier] USS Ronald Reagan. The operation has been so important in terms of rescue and relief operations in Japan, so that many Japanese people were suitably impressed by our relations with the United States."

But this concern and interest in Japan has not always been at the forefront of the American mindset, according to Daniel Bob.

The American interest in Japan, according to Bob, has waned noticeably since the 1980s when Japan's booming economy was preeminent on the minds of US policy makers and legislative members.

"It is important to remember that much of that interest was negative," Bob said, "derived from problems in the bilateral relationship – particularly over trade frictions."

In addition, Bob said, there was at the same time a general sense, or unease, in the US that Japan was on a trajectory to overtake the US economically and become the world's largest economy.

However, much of the prior US interest in Japan has been transferred to China in recent years.

"The triple disaster of March 11, 2011 – the earthquake, tsunami and meltdown of the Fukushima nuclear plant, which is the worst disaster facing Japan since World War II – has reawakened interest in Japan among Americans," Bob said.

"And the outpouring of support has shown that Americans care very deeply about Japan and do recognize the importance of the US-Japan relationship."

And yet, while the panelists were congratulatory about the aid being shared by the US and much of the world, none denied that Japan faced a tough road ahead.

"The earthquake/tsunami/nuclear disaster has been quite a blow for Japan, actually worse than most of us anticipated in the first day or two after the earthquake struck," Lincoln said.

"But the good news is that Japan is already moving out of the disaster period and into recovery and reconstruction. That's going to continue for the next couple of years. Japan hasn't gone away. It is going to be just as important to the United States as it was before he disaster."

Lincoln slammed the initial American media coverage of the disaster, saying that American media watchers were given the impression that Japan was "going to fall apart or disappear." Absolutely not true, Lincoln said.

One of two economists on the panel, Lincoln said that he saw two different sets of challenges facing Japan in the wake of the disaster: one set on the supply side and one on the demand side.

"On the supply side, one thing that I always like to point out to audiences that may include some who are not economists, is that the actual destruction by the earthquake and tsunami doesn't make a bit of difference. We don't measure that destruction," Lincoln said.

He gave the example of an Angeleno losing his house to a fire.

"That value of your house is not subtracted out from American GDP. All we measure with GDP is the value of current output. So what you lose in an earthquake and tsunami is not the value of those things that got destroyed but the loss of output that they might have produced. So, if your factory falls down, what we count is the loss of the output from that factory," Lincoln said.

While he acknowledged that there was indeed actual physical destruction due to the disaster, Lincoln said it was thankfully much more minor than might be assumed.

"The three prefectures that were most heavily impacted by the earthquake and tsunami only produced 4 percent of total GDP in Japan," Lincoln said.

"And, frankly, not everything in those three prefectures fell down. In the city of Sendai, no major buildings collapsed. The real destruction of property was in those fishing villages on the coast. We lost fish processing plants, fishing vessels...yes, that output is gone. The rest of it is damage to factories, so now we are awaiting repair to that damage to get those factories back on line."
Lincoln said that a second supply-side issue is the supply chain effect.

"I initially thought, with only 4 percent of GDP up in these areas, a lot of it will be agriculture and fishing, probably not a lot of manufacturing. But lo and behold, there are some factories in that part of Japan. For example, the factory that produces black paint for automobiles – now out of production for a while," Lincoln said.

A third supply-side issue Japan has to grapple with, according to Lincoln, is electric power shortages in Tokyo.

"The Tōhoku area where the earthquake occurred doesn't produce a whole lot of Japan's GDP, but the Tokyo area does. There was some direct damage to some factories in the Tokyo area, but the big issue there was a lack of electricity," Lincoln said.

While the four nuclear plants that were shut down following the earthquake don't produce enough of Japan's electricity to have made that much of a difference in Tokyo, according to Lincoln, the real problem was "the stoppage of a number of non-nuclear power plants by TEPCO (Tokyo Electric Power Company), despite being further away from the areas with the worst and most direct damage."

On the demand-side of the equation, Lincoln said the Japanese themselves are part of the problem.

"That is this mood of enryo or jishiku (both meaning self-restraint) that seems to have taken over at least parts of Japan. Roughly, the thought is 'the people of Tōhoku are suffering, I shouldn't go out and have a good time,'" Lincoln said.

"I find it shocking, for example, that Ueno Park in Tokyo cancelled hanami (traditional picnics among the blossoming cherry trees) – it did not happen this year. Schools canceled graduation ceremonies, companies cancelled the big ceremonies for their new incoming employees. This is something that economists call the 'paradox of thrift.' Which is basically that if you believe that the world is going to be worse tomorrow, therefore you better save and spend less so that you will be in better shape to get through this bad future – you are going to make that future happen. Because by not spending you just caused the economy to go down.

Lincoln said that a time when Japan is facing a bad situation with supply cuts, consumers in Japan have complicated the economic recovery by not going out and having a good time.

"If the Japanese Prime Minister had wanted to show real leadership, he should have spent Golden Week going to a Japanese ryokan (inn) up in the Tōhoku area, invited all the local politicians and had a big party – spending lots of money. That's what Tōhoku needed – to have the tourists come back and spend money," Lincoln said.

Despite the challenges facing Japan, Lincoln said that there are indications that the recovery is already beginning. He cited numerous GDP figures for various sectors that, while inconsistent in the amount of decline created by the March disaster, all showed measured rebound in April. Lincoln also pointed to other signs of the resilience of the Japanese economy and country as a whole.

"The upside here will be surprising. Electric power is coming back, or the supply capacity in the Tokyo area is coming back quicker than TEPCO had initially predicted. The enryo/jishiku phenomena should be fading out, especially if it is a hot summer...I think a lot of people are going to go out and drink their beer. The supply chain disruptions will be beginning to fade out – several weeks ago Toyota had said 'Oh, my goodness, not until the end of this year,' and now we are hearing it will be the end of September before they are back to full production," Lincoln said.

In fact, Toyota announced June 16 that it was operating at 80 percent of full production, with eight of 12 American production lines back in full operations as of June 6. The automaker predicted it would be back to 100 percent production by sometime in September.

Lincoln, when asked by an audience member whether Japan's huge government debt would cause problems raising money for recovery from the disaster, offered a blunt assessment of "No."

As an explanation he offered up an anecdote relating how in the first day or two after the disaster, the Japanese yen actually went up, because speculators around the world were convinced that Japanese firms would have to liquidate holdings abroad in order to take the money back home and pay for reconstruction.

"The speculators were wrong," Lincoln said."

The Japanese have enough money at home. Just because the ratio of gross Japanese government debt to GDP is over 200 percent is academic. The Japanese government can float 10-year bonds at about 1.3 percent interest, which is incredibly low. That is not going to change in the next several years. Do they have a problem 10 to 15 years from now? Yeah, maybe. But not now. So, the important thing right now is to get the reconstruction done, get the economy growing again, and then that makes the whole debt problem more manageable in the future."

Consul General Ihara also noted several issues he felt must be handled in conjunction with the disaster recovery and reconstruction.

He said the first is that Japan has to tackle the simultaneous reform of the Japanese social welfare, social security, and taxation systems in order to battle the deficit. Ihara described this as the number one issue that Japan faces as a consequence of the disaster.

Another issue facing Japan – a complete overhaul of the nation's energy policy – while a sizable challenge, could offer greater opportunity for Japan to innovate according to Ihara.

"I hope that we will make further shifts toward green energy. So this earthquake and tsunami gives us a very good opportunity to further strengthen our green energy policy and energy conservation. And through this contribution to the development of alternative energy Japan can help in some way with the issue of global warming. In this way, I think that Japan's relationship will be much more useful to the American people," Ihara said.

Panel moderator Daniel Bob agreed, adding that while relief and rebuilding efforts will go on for some time in Japan, "there is some hope that out of the tragedy of the disaster, it will serve as something of a catalyst for renewal in Japan, helping return that country to a greater prosperity and growth."

Bob said he hopes that rebuilding will provide an impetus for a new wave of innovation in sectors such as energy.

Panelist Kappei Morishita, general manager of the media and content alliance office with Panasonic R&D Company of America said he is hopeful of other changes springing from the disaster.

Pointing to the long running political turmoil in Japan and lack of strong political leadership, Morishita is looking to the post-earthquake generation to change that.

"Looking at how the young people really see this disaster as a massive challenge – probably the biggest challenge of my lifetime as well as all those born after World War II – I think young people see this as a real serious threat and challenge which will need them to change their attitudes," Morishita said.

"I think, not in the next few years, but maybe in five to ten years, I think the Japanese people have the strength to turn it around to really create a new paradigm...a new attitude. And, I think that the politics will change along with that."

Despite the challenges facing Japan, Lincoln remained optimistic in his concluding summary.

“In the effected areas of Japan where damage occurred, reconstruction is already beginning to kick in, and you are going to see a bump up in GDP over the next couple of years as the construction industry – iron, steel, glass – all of those thing that go into building get a boost,” Lincoln said.

“So, at the end of the day, Japan is still the number three economy in the world; it will, and already is, beginning to recover from this disaster; it is still one of the most affluent nations in the world; and the supply chain disruption illustrate how closely we are tied. That is the reality we face. Japan has not gone away – it is rather resilient.”