Financial Turmoil Following the Tsunami in Japan
An earthquake measuring 8.9 on Richter scale, giant tsunami reaching 33 feet in height, more than 405 aftershocks, and amidst all this, an impending nuclear crisis – perhaps, this is what describes Japan the best these days. The Japanese economic turmoil was still raging when the worst of the natural disasters struck. The IMF says that the ailing country has not yet asked for help, but that seems more because it is still struggling to prevent a complete meltdown at its Fukushima Daiichii nuclear facility, which has also undermined the plight of the earthquake survivors at the rescue camps.
The death toll has already crossed 20,000 and is increasing by the day. However, it is difficult to estimate the true damage cause by last Friday’s earthquake and Tsunami as of now. There are a lot of areas still unapproachable by the rescue teams and no estimate of the possible level of destruction could be made in these regions. Infrastructure has been severely damaged, including discontinued flights, affected railways, disheveled ports, blackouts, and so on. To add to the mess, suppressed and contradictory information is making the situation murkier. Japan is expected to take years or may a whole decade to make up for the loss, a situation that is sure to impact its dragging economic growth.
If the emergency teams fail to restore power supply to the cooling units at Fukushima reactor, the possible damage could be severe. In a positive development, partial electricity supply was restored to reactors 2, 5, and 6 on Sunday, March 20. However, Japan has categorically stated that the outcome remains uncertain, considering the situation at reactor 3 that contains plutonium fuel and reactor 4, where water tanks for spent fuel have already run dry. The latest tested samples of plants and milk in the area have confirmed the presence of radioactive particles beyond acceptable levels. Apart from the wastage of domestic consumables, export is directly impacted by this, as various countries are planning to block organic imports from Japan. On the other hand, the earthquake aftershocks and fears of a nuclear disaster have sent Tokyo into a virtual limbo. People are fleeing from the capital and overall commercial activity has been greatly hampered, whereby major corporations have suspended their operations. The acute power shortage has further added to the troubles, affecting production, transport, commutation, and other normal day-to-day activities. It expected take at least up to the end of April when oil-based power supply begins compensating for the lost power generation at Fukushima plant. The current analyst estimates of the possible losses ranges wildly between a staggering $60 billion and $200 billion!
The Japanese Problem
Postwar, there came the policy call for higher savings by the Japanese policymakers, which the closely-knit nation followed religiously. Greater liquidity led to higher investments and wider operations. In time, the nation became the leading exporter of cutting-edge technology that witnessed, as high as, 10% annual growth in the 1960’s. However, the enthusiasm soon became the driving force for artificially inflated asset prices on the back of rampant speculation. When the pricing bubble burst, Japan’s economy lost its momentum so rapidly that it went into a liquidity trap and eventually, into deflation. Government’s desperate attempts to revive the economy pushed it under huge debt. Meanwhile, the domestic savings dropped from peak rates of 15% in 1980’s to around 2% presently. By the time there were some initial signs of stabilization from 2005 onwards, the global recession came as a fresh blow to Japan. Though it was not directly exposed to the substandard securitized assets, it could not ward off the ripple effects of the crisis either. The demand for its output fell to record low levels globally, as its key trading partners suffered. Today, Japan stands second in terms of public debt at over 200% of the GDP (over $2.5 trillion) and is still weak in the knees. The credit watchdogs smelt trouble earlier this year with S&P downgrading its ratings from AA to AA- in January and Moody’s lowering its outlook from ‘stable’ to ‘negative’ in February. The grounds are the Government’s lackadaisical policy measure towards addressing the immediate and long-term financial concerns.
The earthquake-inflicted areas are primarily driven by agriculture and fishing, contributing 4-6% to the GDP. The latter was the first casualty of the monstrous tsunami that followed the earthquake. Agriculture has been equally affected and perhaps more due to the leakage of radioactive materials in the region surrounding Fukushima reactor. Probably, this is the first time that the legendary Japanese concept of JIT (just-in-time) inventory has become a real problem. When the events in last few days forced temporary shutdowns in some of the feeder industries, the next ones in the industrial chain had to follow. Collectively, this has led to far greater losses in terms of lost opportunity and acute shortage of some produce. The production is likely to suffer for some more time to come due to the infrastructural and supply breakdown. The reconstruction period may witness some spurt in activity and resulting growth in the economy, but unless Japan tackles its serious debt issues and liquidity trap, things will fall back to the present state. Some economy watchers believe that the newly added earthquake, tsunami, and nuclear crisis to Japan’s list of troubles threaten to place it on a death spiral. More so as the falling savings rate will leave a narrower margin to absorb the surging public debt in future. That means Japan would be borrowing from external sources and losing its present ‘low-interest’ edge. The Japanese Yen is already showing an uptrend on account of expected spurt in demand, a move that is likely to cripple the economy. High level of external borrowings could eventually prove fatal to the Japanese economy.
The Silver Lining
Historically, any post-crisis periods have been marked with increased movement in the markets and new employment opportunities. One question that kept coming up over the last 10 days was how Japan will raise additional funds needed for the rebuilding efforts, in the first place. So far, the country has been raising credit at favorable terms internally, but that may not be true in the future. Nevertheless, what distinguishes Japan from the other debt-plagued nations is that its major debt holders (almost 95.4%) are domestic entities and individuals. Another related point is the Japanese patriotism. The Japanese have traditionally been ardent nationalists, who played pivotal role in the postwar period to take the country from shambles to the top. Japan still has enough savings rate – corporate and individual combined– to have a current account surplus ($166.5 billion in 2010). There is a greater likelihood of the Government attempting to raise money through further debt issues domestically and an even greater possibility that it will be subscribed. Over its sunshine years, Japan built up a huge corpus of foreign assets (over $3.7 trillion), which may be liquidated if everything else fails and effectively prevent the feared death spiral of the economy. Indeed, the priority at this juncture is to rebuild the economy rather than merely plugging the deficit. Nevertheless, fiscal measures to tap additional funds from consumption can substantially contribute towards narrowing the deficit as well.
Japan is the same country that faced the devastating Kobe earthquake in 1995 and it is the same country that rebounded the very next month with an impressive 2.2% industrial growth. This devastation may ultimately become the required stimulus that takes Japan out of its financial ditch with a jerk. Make or break is in its own hands, it seems and much depends upon how Japan responds to this call.