The scale of the Japanese cataclysm is so immense that if such an earthquake and the following tsunami and fires had struck the archipelago of Philippines or Indonesia the countries would have collapsed. But Japan—which has experienced similar, bitter disasters previously, although on a considerably smaller scale—a wealthy country and its brave people, will cope with the situation.
They will cope also because the reaction of central and local authorities, as well as all relevant services, has been instantaneous and well-coordinated, unlike the U.S. response after Katrina struck and caused the devastation of New Orleans in 2005, during George W. Bush’s presidency. In a moment of catastrophy, the high level of discipline, authentic social cohesion and genuine solidarity among the Japanese people are priceless.
By no means should the consequences of the earthquake in Japan be played down. It is a cataclysm. However, wealthy and affluent countries stand up to such disasters easily and are likely to quickly overcome their results. The same scenario could be observed, say, after the tragic earthquake in Kobe in 1995, when 6,500 were killed. Signs of that catastrophe may still be traced, but it had been dealt with differently than last year in Haiti, where the shocking death toll reached over 300 thousand people and its economic consequences will make themselves felt for a very long time; longer than a generation. The country that was destroyed had already been rated among the poorest. Also in other countries affected by strong earthquakes— Pakistan, Iran, China— there are still regions with visible, open wounds. This pertains to material issues, not to mention personal tragedies…
What will be the economic consequences of the Japanese earthquake? Significant for the country, as huge losses were incurred. The rebuilding of towns and infrastructure will entail considerable expenditures, both private and public. For the state—already indebted over a reasonable amount (the public debt has reached 195 per cent of GDP)—this means a necessity of increased financing from the deficit which approaches 7 per cent of GDP. Instead of dropping, it will grow again. Perhaps extraordinary tax increases will have to be introduced—which would be justified—in order to acquire funds and eliminate consequences of the cataclysm. I know the areas touched by the catastrophe, I had also been before the catastrophe to the most damaged among the bigger cities—Sendai—and when I see the destructive tsunami wave forcing its way from the Pacific coast deep into the land it seems surreal. But it’s been real…
Each of the solutions—increased financing through emission of additional debt or increased taxes—may (but does not have to) hinder acceleration of the growth which is so badly needed in Japan to break the circle of stagnation and deflation (currently prices are lower by 1.3 per cent comparing to the relevant period a year ago, while in China they are higher by 1.5 per cent and in the USA by 2.6 per cent). The 1.7 per cent rate of economic growth assumed for this year will be revised downwards, maybe even by a significant margin, close to zero. It is true that the great scope of infrastructure and construction works will foster advantageous business cycle, but at the same time enormous losses incurred as regards manufacturing and service capacities, as well as broken cooperation links and transport network will definitely reduce the level of production. In spite of that the rate of employment will grow and the rate of unemployment will drop. At present the unemployment rate is only 4.9 per cent, which is considered high in Japan, while quite low according to international standards (it is approximately twice as small as in the USA or European countries).
The breaking of cooperative links also has negative international consequences given the relations with companies operating in other parts of the globalized market. Some companies—especially of the electronic, photo-optical and automotive industries, operating most of all, but no exclusively, in Asia—already do experience disturbances in the continuity of production. However, global consequences of the Japanese catastrophe should not be overestimated. Apart from the above mentioned aspects it is meaningful so far as the Japanese economy still counts in the world. The country generates GDP of $5.4 billion (in purchasing power parity $4.3 billion), placing Japan as the third-biggest economy in the world: after the USA and China, and before India and Germany.
Japan, strongly oriented on the strategy of growth drawn by exports, is characterized by structural surplus of the trade balance, which for the last 12 months has equalled approximately $85 billion. With regards to the current account, the positive balance equals $191 billion. To compare, China’s surplus reaches $331 billion, and U.S. deficit exceeds $460 billion. At present—this year and probably for the next couple of years—the surplus will be lower, as the Japanese will be forced to import a little more and at the same time, temporarily, they will be exporting less. How much more and how much less, we will see, because this depends not only on the physical dimensions of the incurred losses but also on the world’s business cycle and demand of other countries for Japanese products, as well as on how the movement of economic flows and resources will influence the exchange rate of the Japanese currency.
In the last 12 months the yen has been appreciating by around 9 per cent, becoming stronger from 90.7 yen for the US dollar to 82.6. I estimate that the purchasing power parity oscillates between 100 and 105 yens per dollar, what implies that until the tsunami hit the market revalued the Japanese currency by approximately a fourth. Now a reverse tendency may be expected, that is yen weakening. This, in consequence, will strengthen the competitiveness of Japanese companies on the international market which has been deteriorated in the past years. Having such a strong yen as recently, it is extremely difficult to compete with manufacturers not only from China, Taiwan, Malaysia, the South Korea or Indonesia, but also from the USA, the UK or France. Numerous automotive enterprises like the tycoons Toyota or Honda, were doing just fine, but businesses of the electronic industry, such as Toshiba or Sharp, were weaker and weaker. As the former’s share in the market was increasing, the latter’s was decreasing.
The reconstruction of the destroyed Japanese economy components is a question of several years. As far as the infrastructure is concerned, the damage is enormous, but only on part of the territory. At best, however, it will take 2-4 years of exhausting efforts and dozens, if not hundreds of billions of private and state outlays to do it. Additionally, it is beyond all doubt that it’s going to be an exceptionally costly period for insurance companies, mainly the domestic ones, since foreign capital involvement in that segment of market is limited.
Thus, the earthquake of 8.9 magnitude—which is several hundred times stronger than the one which struck recently on the Southern Island of New Zealand (6.3 degrees) or almost a hundred times more powerful than the last year’s Armageddon in Haiti where the main quake was 7.0 degrees in strength—and the monstrous size of tsunami gave a big blow to the Japanese economy. But the Japanese are going to cope with that. So is the world.
The political consequences of the earthquake in Arabic countries and Iran will go even further but they are currently impossible to predict. Because we must always remember that things occur the way they do, as a lot of things happen simultaneously. The increase in fuel prices affects the Japanese economy which fundamentally imports this basic raw material. So, the economic consequences of the political turmoil in the North Africa and Middle East are—and will be—more significant than those in the eastern part of Japan. How much more? We don’t know, particularly as no one has ever developed a generally applicable scale for measuring political shocks and their economic results. But the shocks under consideration are of big significance, of the upper scale values.
The situation in the Arabic counties and Iran will affect Japan as well as other counties importing fuel and gas. The Japanese terms of trade will continue to deteriorate because the prices of goods imported by Japan will go up more quickly than of the exported ones. This will result in a price increase pressure, which may break the recent years’ syndrome of deflation-cum-stagnation, but not the way it should, i.e. not through the mechanism of a price increase pulled up by the rising effective demand, but through prices increasing as a result of production costs going up. The demand-pull inflation and the cost-push inflation is not the same neither from the viewpoint of causes, not the consequences.
The other implication is that the Japanese assets invested abroad meet the assets of other global investors, for example, states exporting petroleum. Of big meaning here is especially Saudi Arabia (Libya accounts for only 2% of international extractions). Consequently, the relative strength of countries changes again: the position of OPEC countries, also the Arabic ones, may become stronger (if they manage to cope with the political tsunami and stabilize the situation in a reasonable way), whereas the position of Japan may even get relatively weaker. Indeed, we are dealing with tectonic movements.