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Thursday, March 17, 2011

Japan's immense challenge


Special to The Japan Times

HONG KONG — Prime Minister Naoto Kan rightly called it the worst disaster to hit Japan since World War II. But the question now for Japan is whether the massive earthquake and tsunami that smashed the country on Friday can prove to be the earthmoving event that wakes up Japan's politicians to set the economy on a more secure foundation.

There are simply too many problems for stunned ordinary people or ordinary politicians to comprehend, especially given the short time before the huge earthquake, now estimated to be of magnitude 9, triggered a massive tsunami, followed by fears of nuclear meltdown at power plants in the area.

The nuclear question is a separate but linked potential disaster, not least because nuclear power accounts for 30 percent of Japan's energy supplies. The government is trying to move people out of the possible danger zone without alarming them, but it is a fine path to tread, especially when Tokyo Electric Power (TEPCO), which runs the plants, has long been accused by critics of being economical with the truth in covering up accidents and falsifying repairs at its nuclear installations.

The damaged plants still have to be brought under control. Afterward TEPCO will face an inquest of whether it failed to test properly for an earthquake of this magnitude, let along for a tsunami. Ironically, the 40-year-old plant in Fukushima that is at the center of the meltdown worries was given the green light for another 10 years of life only a month ago.

Some reports claim that TEPCO tested for only a 7.9 earthquake believing that this was the worst that could hit. If so, it was a grave mistake. Seismologists say that the immense magnitude of last week's quake was merely Japan's largest since proper records were kept, and in the past the country experienced larger ones. But some nuclear specialists are praising the Fukushima plant, saying that it was marvelous construction to be able to withstand such a temblor and it was only the tsunami that wounded it.

But this merely leads to the question whether an earthquake prone island country like Japan should rely so heavily on nuclear power. Successive governments have planned to raise nuclear power to 40 percent of Japan's energy mix, and hoped that companies like Hitachi and Toshiba would be able to promote a green image for Japan with nuclear exports that would help pay for imported oil on which the country has to rely for the rest of its energy.

The cost of the disaster is a guessing game. The Great Hanshin Earthquake of 1995, which shattered Kobe, was estimated to cost ¥10 trillion, or about 2.5 percent of GDP. It took about 15 months to get industry in the area back on its feet, but Kobe port has not recovered its pre-eminence.

The area of the Tohoku Pacific earthquake is very different. It is a broad and mostly rural, whereas the Hanshin earthquake hit a narrow urban area. The widespread damage in Tohoku has been caused by twin effects of shaking and the tsunami and devastated a wide area with major effect on electricity supplies. The ratio of energy released by the Tohoku earthquake was roughly about 1,000 times greater than that in the 7.3 Hanshin quake.

Optimists say that Japan was fortunate in that the earthquake struck far north of the country's main industrial heartland concentrated around Nagoya and Osaka and southward. Industrial production in Tohoku includes car- and beer-making and some information-technology work, but it is relatively small. Robert Alan Feldman and his team at Morgan Stanley MUFG say that it is too early to put a number on the economic damage, but they estimate it is "likely to be several tens of trillions of yen."

In theory, the aftermath of an earthquake could be the shock therapy that might help create a better and stronger Japan. Money will have to be spent rebuilding the damaged infrastructure, and if it is spent wisely and well it could not only strengthen the buildings, homes, roads, ports and power stations, but the spending itself would promote confidence that the country is getting back on its feet and trigger a surge of economic energy.

It is easier said than done. The lessons from Kobe are not encouraging. The rush to rebuild homes led to replacement of fire-prone boxy homes by shoddy blocks of flats. Some distinguished commercial blocks were built to better standards to resist earthquakes, but Kobe is a piecemeal patchy city. Planning for reconstruction was hurt by Japan's curse of consensus, under which a handful of opponents can obstruct a new development.

In addition, after the Great Hanshin Earthquake Japan's national finances were in a better state than they are today, with the country's debts totaling about 220 percent of gross domestic product, or more than twice those of Greece and other troubled European countries. Japan has been able to borrow without the restrictions imposed on Greece because most of the government debts are owed to Japanese, but the government has been talking for months about the need to raise taxes to get the budget deficit under control without having the courage to do anything except study the problem.

Japan's biggest problem is where the economic tectonic plates meet the political ones. Planning for a better Japan depends on the quality of political leadership, which has been sadly lacking. Kan, who has led the handwringing over the disaster, has looked for weeks like a man in imminent danger of losing his job. The only question is who will wield the knife, his archenemy Ichiro Ozawa or any number of others in his own party, or the opposition Liberal Democratic Party or one of the opportunistic small parties that fancy putting together a coalition to enjoy the perks of power.

There is talk now of all political leaders pulling together, but it sounds more ritualistic than convincing. No one wants to be seen to be taking advantage of disaster, but nor is there a man with a plan to seize the opportunity in the middle of disaster. Japan faces the problem of having to spend trillions on reconstruction that it does not have. Does it raise taxes and destroy economic confidence and the recovery? Does it print money and spook the markets? Does it sell its U.S. treasury holdings? Or can the government find a new way to release the pent-up energy and ability of the Japanese people?

Unfortunately, none of the leading politicians of any party understands that if Japan is to be revived economically, it needs reform and further liberalization. Many political leaders are close to cozy and sometimes corrupt vested interests, such as construction and agriculture, which help to feed the political machine, and must be looking greedily at getting their hands on reconstruction funds. Poor Japan.

Kevin Rafferty is a veteran journalist.


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