JAPAN : MORE THAN A MOMENT / THE FINANCIAL TIMES ANALYSIS ( VERY HIGHLY RECOMMENDED READING )

Japan: More than a moment

By Mure Dickie

Published: April 20 2011 23:37

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The moment the quake hit: lower house members prepare to take cover. Naoto Kan, prime minister (centre), has called on the Japanese to ‘re-channel’ the spirit of postwar rebuilding

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When a magnitude 9 earthquake struck off north-eastern Japan at 2.46pm on Friday March 11, it changed everything – and nothing. By unleashing a tsunami that devastated the adjacent coast and sparked the world’s worst nuclear crisis in 25 years, the quake at a stroke redefined the priorities of a nation that has in recent decades sometimes seemed to have lost its way.
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But the disaster and the trouble at the radiation-leaking Fukushima Daiichi atomic plant in themselves do nothing to resolve – and could even exacerbate – some of Japan’s most pressing problems: fragile government, unproductive politics, anaemic growth and spiralling state debt.

There is no doubt that 3/11, as the quake and its terrible consequences have inevitably come to be known, marks a watershed for the world’s third-largest economy. The shock of seeing nearly 30,000 lives washed away has seared into the national psyche. The dismal failure of the nuclear plant’s safety systems will further undermine battered public faith in the once-vaunted political and economic system forged in the smouldering and radioactive ashes of Japanese defeat in the second world war.

Indeed, Takashi Mikuriya, a political scientist at Tokyo University, has declared that the earthquake marked “the end of the ‘postwar’ era and the beginning of a period that should be called ‘post-disaster’”. A “new shared experience” was needed to bring an end to the era that began in 1945, Prof Mikuriya writes in the current edition of Chuokoron, a monthly magazine. “This has been mercilessly provided by 3/11.” For optimists, the parallel with the calamitous legacy of the second world war is appealing.

Naoto Kan, the prime minister, who was born in 1946, sees lessons in the nation’s miraculous recovery that formed the backdrop of much of his life. When he was young, he told journalists recently, his family was still using the tip of an unexploded Allied incendiary bomb as a weight for pressing pickles. “Let us once again recall the spirit of reconstruction we felt then, reflect upon it, and re-channel it for our reconstruction work now,” Mr Kan said.
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See graphic here
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The primary victims of the March disaster have already set a potent example for their compatriots. In the face of often unspeakable loss, residents of devastated towns and villages have in general reacted with phlegmatic and practical calm and self-discipline – even in areas threatened by radiation leaks from the Fukushima plants. There has been none of the chaos or breakdown that might have beset more fragile societies.
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In a reflection of wider social solidarity, opinion polls suggest Japanese voters back the introduction of higher taxes to pay for reconstruction. One survey by the mainstream Mainichi newspaper found 58 per cent of respondents favoured such a rise, with only 33 per cent opposed.
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Indeed, the public has also responded to the disaster with generosity. By April 12, the Japanese Red Cross alone had received Y124bn ($1.5bn) in donations for the victims, far more even than the Y81bn total the agency and other groups had gathered a month after the 1995 Kobe earthquake.
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Like the Kobe quake, 3/11 is set to mark another big step in the authorities’ gradual acceptance of a wider role for aid charities and other non-profit organisations. Mr Kan – a social activist before he was a politician – has decreed that such groups must play a central role in the recovery.
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The prime minister now sees towns and villages levelled by the raging waters as opportunities to create new and more viable communities in an area that has been suffering economic stagnation and demographic decline. New eco-towns warmed by biomass fuels could set an example of sustainable living – a “dream society of the future”, Mr Kan says.
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Environmentalist hopes are also being fuelled by the electricity shortages created by the crisis at Fukushima Daiichi, and earthquake and tsunami damage to other power stations. Many companies have already been cutting power use by switching off unnecessary lights and equipment – a habit that some hope will reduce waste in what is already the world’s most energy-efficient big economy.

Other grains of comfort can be found. The disruption caused to global supply chains over the past six weeks has at least reminded the world of Japan’s continued economic importance, not least since the Tohoku area most affected is far from being one of the country’s industrial centres.
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The very scale of the damage caused by the earthquake and tsunami will also create new sources of demand in an economy that has been suffering from weak consumption. About 85,000 homes will have to be rebuilt and more than 200,000 cars replaced, as well as ports, factories and other infrastructure. Combined with the constraint on supply that could be created by power shortages, some even see the disaster as dealing a final blow to the deflation that has dogged Japan in recent decades.

Much of the burden of the Y16,000bn-Y25,000bn in damage is likely, however, to fall on an already fiscally stretched government. Even before the tremor hit, gross state debt was set to soar above 200 per cent of gross domestic product in 2011 and debt issuance was set to be a bigger source of government revenue than taxes for the third year in a row.

The huge pool of domestic savings means the government should have no problem funding the deficit, but analysts warn that the extra outlay brings an eventual day of reckoning closer. “Any further shock could create a tipping point in the government’s ability to secure affordable finance,” writes David Rea at Capital Economics, a research house.

While politicians including Mr Kan have long stressed the need to get Japan’s fiscal house in order, the prime minister’s ability to act is limited by deep divisions within his ruling Democratic party, and with the opposition groups that control the Diet’s less powerful upper house and can block the path of DPJ legislation.

At first, the calamity and a popular yearning for unity seemed to be creating the possibility of a more productive politics. DPJ insiders talked of a potential grand coalition with the formerly long-ruling Liberal Democratic party, or at least close co-operation on reconstruction bills. Many politicians are keenly aware that public faith in all the main parties is at a low ebb.
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“Now we need politics that encourage hopeful action,” says Hiroshi Nakai, a DPJ lower house member and former minister of state for disaster management. “This is not a time for politicians or political parties to engage in petty infighting.”
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Yet the fragile tsunami truce has already fractured. Last week, Mr Kan suffered a rhetorical broadside from within his own party, when Ichiro Ozawa, a scandal-plagued former DPJ leader, denounced him for “not exercising leadership” in the crisis.

The LDP, still smarting from its general election defeat in 2009, has revived a campaign to force Mr Kan from office. “To continue under the current leadership would be extremely unfortunate for the people,’’ says Sadakazu Tanigaki, LDP president.
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At first, the disaster looked to be the saving of Mr Kan: before it his poll ratings had slid to perilous lows and his future had been thrown into doubt by a minor fundraising scandal that broke just hours before the earthquake hit. But Mr Kan has struggled to recast himself as a disaster leader and support for his cabinet has recovered only slightly, to 20-30 per cent. Now, his vulnerability raises the possibility of yet another spin of Japan’s revolving-door premiership.
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A failure by Japan’s political class to rise to the challenge of the tsunami could have far-reaching implications. For optimists, it should promote a party realignment that would promote policy debate. For pessimists, it could encourage potentially dangerous populism and nationalism. In the short term, however, it would spell more of the sort of stasis that has served Japan badly in recent years.

Indeed, in spite of the vast scale of the suffering caused by the March disaster, the reality is that it may have been too small to truly reshape the nation. Damage to housing, social infrastructure, private plants and other capital stock is estimated to total 3-5 per cent of nominal GDP. But that toll is dwarfed by the 86 per cent damage inflicted by the second world war, or even the 29 per cent lost in the Kanto earthquake of 1923, according to the Bank of Japan.
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The war and 1923 quake also devastated the capital, while 3/11 mainly hit a region generally considered a backwater. Once the radiation leaks are stopped and power shortages ease, life in Tokyo will quickly return to normal – at least for as long as the capital does not suffer any new seismic disaster of its own.
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Talk of a national “shared experience” may also prove overdone. Divergent consumer moods in the disaster-hit east and unscathed west have, for instance, prompted Rakuten – Japan’s biggest online retailer – to showcase different goods in each for the first time.

Shoppers in the east wanted emergency lights and bottled water, says Hiroshi Mikitani, Rakuten founder, but those in the west did “not want to see all these ‘crisis products’ they want to buy suits, bags, luxury goods”.

Masatoshi Honda, a political scientist, says the earthquake and tsunami created a moment of real national unity, but that the opportunity for reform this presented has already been wasted by Mr Kan’s uninspired handling of the nuclear crisis. “This was a chance for Japan to rebuild as a new nation but, because of the lack of leadership, we have failed,” he says.

As a society and economy, Japan is still among the most successful. No one would wish for the kind of blank sheet created by the second world war. Even if the tsunami and nuclear crisis do not mark a turning point of that magnitude, they will surely lead to action on the most obvious failings the disaster exposed – not least an ineffective nuclear safety regime.

Shijuro Ogata, a former BoJ deputy governor, sees a possible driver for change in growing dissatisfaction with the leadership provided in recent decades by the elite – particularly when contrasted with the fortitude shown by tsunami survivors.

“My standing joke is that it is a country of good soldiers but poor commanders and I think more people are coming to agree with me,” says Mr Ogata – though he adds that raising the calibre of the political class will be a long-term task. “I hope change will come, but I’m afraid it will take time.”

DEFLATION

Although price rises may return this year, few are willing to declare the long malaise is over

In the aftermath of Japan’s triple-whammy earthquake, tsunami and nuclear crisis, some analysts have begun wondering if the disaster might finally free the world’s third-largest economy from the grip of deflation.

The logic is straightforward. If price falls are in large part the result of overcapacity, prices will be supported by the brutal destruction of production facilities along the north-east coast and the power shortages that have hit business across eastern Japan.

People in the area will meanwhile need to rebuild their homes and buy new cars and other replacement goods, while companies will need to build plants and the state will have to replace or repair critical infrastructure – all creating demand.

Even before the magnitude 9 earthquake of March 11, the central bank took the view that victory against price falls was in sight, forecasting that core consumer price inflation in the year that started this month would reach about 0.3 per cent. Such expectations have been bolstered by rises in commodity costs, which have a big effect in Japan because it depends on imported resources.

For some observers, ending deflation has long been seen as vital in raising economic growth rates and shaking off the malaise suffered since the bursting of Japan’s 1980s asset bubble. Ruling Democratic party politicians, for example, have formed an “anti-deflation alliance” to try to press the BoJ to beat deflation, arguing that falling prices suppress spending by encouraging businesses and individuals to hoard their money.

So can alliance members now furl their rhetorical banners and declare victory? Not necessarily. The combination of natural disaster and nuclear crisis is weakening sentiment among households and business, thus pushing down spending. “Maybe the supply constraints won’t trigger inflation because aggregate demand will continue deteriorating due to growth expectations falling ever lower,” write economists at BNP Paribas.

Inflationary pressures could also be softened by corporate and social efforts in response to the disaster. Many businesses have kept prices steady even in the face of shortages, reluctant to be seen as profiteering.
Local media say authorities plan to allow carmakers to respond to a shortage of vital computer chips by co-ordinating their purchases rather than trying to outbid each other.

The deflation challenge will also be deepened – statistically speaking at least – by a five-yearly rebasing of the consumer price index, due to take effect in August. That could reduce reported inflation, potentially fuelling public concerns about the economy. The last index rebasing sparked what officials describe as a “CPI shock” that sent bond yields tumbling.

Investors this time should be better prepared, but even if CPI turns positive this year as expected, few are likely to be willing to declare he demon deflation permanently dead.

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Copyright The Financial Times Limited 2011.