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SpirE-Journal 2011 Q1

Japan’s Triple Disaster: All is Not Lost

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Japan’s Triple Disaster: All is Not Lost

The March 11, 2011 earthquake was the biggest to hit Japan since the late 1800s, triggering a 30 foot tsunami wave and a nuclear crisis. The death toll was estimated at 20,000 and the immediate economic loss exceeded USD 300 billion. The long term economic, political and environmental impact of this triple disaster is still unfolding. Spire takes a look at the implications of this tragedy and asks if a silver lining exists for Japan and the world.

The facts surrounding the magnitude-9 earthquake that struck off the Japanese coast on 11 March 2011 are by now well known. It triggered severe tremors in the Tohoku (northeastern) region of Japan and as far afield as Tokyo. This wrought structural damage to the nuclear reactors at Fukushima, triggering a struggle to prevent a melt-down of the reactor cores and radiation seepage into the environment. Even more damagingly, the quake created a 30 foot high tsunami that crashed into the Tohoku coastline, killing thousands and displacing thousands more, many of them elderly Japanese. 

The business impact of the quake underlined Japan’s important role in the world economy. Production of key technology parts was disrupted, leading to momentary factory shutdowns in countries like China and the USA, not to mention surging prices for things like NAND semiconductors. Partly as a consequence of these disruptions, the Japan and global economy took a hit from the disaster. The crisis around the Fukushima reactors has also raised major questions about the future of nuclear power generation in the world, with Germany declaring shortly afterwards that it would gradually phase out all nuclear reactors on German soil. Historians may remember this disaster as the event which turned the tide of global opinion against nuclear power. 

The humanitarian impact of the crisis, however, holds out a different kind of prospect. While riots, looting and crime are commonplace wherever disasters of such magnitude strike, what the world saw in Tohoku was a scene of people co-operating with one another and behaving peacefully in the fact of tragedy. Many inside and outside of Japan point to this as a potential catalyst for much-needed political and institutional reform within Japan. But how realistic are these expectations? 

Macro Economic Implications

The blow to Japan’s economy from the disaster was much smaller than expected. Analysts at Capital Economics have estimated that Japan’s economy will shrink by 1.5% in the second quarter of 2011, with growth likely to return to Japan in the third quarter. Many had expected more shrinkage, as the monetary value of the damage was some 5.5% of the country’s Gross Domestic Product (GDP).

Economists who have studied major disasters in the past tend to conclude that long-term economic damage to First World countries is rare, as reconstruction efforts are typically competent and swift. Ironically, a quarter or two down the road, such disasters often lead to breakneck economic stimulus, as reconstruction funds pour into construction and other sectors. 

A bigger blow to the economy would be long-term, via the impact on the fiscal deficit. The government’s net debt ratio may rise from 110% at the end of 2010 to 120% by December 2011 due to the Tohoku earthquake. This would not provoke a debt crisis of Greek proportions as almost all of this debt is Yen-denominated and held domestically. However it would increase the drag on the economy and may force up taxes in the longer-term. This would cripple the economy, going by the chilling effect of Japan’s 1997 sales tax hike. As 22.7% of the nation’s population are aged 65 years and above and are not actively earning income, a sales tax hike would deal a savage blow to consumer spending in the economy, with over a fifth of the population reducing spending.

A government sales tax hike would make over a fifth of the population spend less.
Industry Specific Implications

The disaster’s impact on specific sectors of the economy was tangible and widely reported. While it was not the first time that a natural disaster in one country had disrupted global supply chains, it was certainly one of the most dramatic – in itself a powerful testament to Japan’s place in global industrial production. 

The Automotive and Electronics Industry

The Tohoku disaster was a big blow to the auto industry, as Japan is home to many of the world’s leading automakers and auto parts suppliers. For instance, during the crisis, General Motors, Honda, Toyota and Chrysler factories in Japan and world-wide were unable to procure auto parts on time. This was worsened by their use of the just-in-time (JIT) model, which minimizes inventories of finished goods. JIT turned the parts crunch into full-blown factory shut-downs. Some companies tried to compensate by hiking production in other countries such as India and Pakistan in a bid to meet demand. The shortage of Japanese cars also caused global prices of Japanese brands to increase, making Japan-made vehicles temporarily less competitive. 

The impact on the electronics industry was no less dire. Japan produces many highly valuable parts and components used in the production of computers and consumer electronics. In particular, product categories such as semiconductors and LCDs were badly hit, as the Tohoku region produces many parts used in their production, like silicon wafers and chemicals for LCD production. The companies affected included global brand names like Sony and Toshiba as well as a few which are less well-known but play a vital role in electronics supply chains, such as Shin-etsu Chemical. In most cases, production was eventually resumed at the affected factories, but at lower output levels, as the government ordered manufacturers to avoid over-loading the electricity grid, already strained by the down-time at the Fukushima reactors. In some cases production was switched to other regions of Japan. But the net effect of all these disruptions was to raise the spot prices for electronics components like NAND semiconductors, with some categories seeing prices sky-rocket. 

These events have raised questions about the viability of the JIT system, which is very vulnerable to shocks like what happened at Tohoku. There is no doubt that JIT has enabled massive costs savings in the last century by slashing costly inventories. However, the increasingly frequency of natural disasters in the past 10 years or so has raised calls for JIT to be moderated with bigger inventory buffers. It remains to be seen if manufacturers will heed this call to revive inventories or would rather address the problem by diversifying production regions – or even relocating production away from disaster-prone zones. 

The Food Industry

The tsunami disaster wrecked the considerable fishing industry in the Tohoku region, traditionally a fishing hub. The damages incurred by fishing ports, markets and vessels in Iwate prefecture alone was USD 1.3 billion. 

Even more seriously, the nuclear crisis at Fukushima provoked a global backlash against Japanese food products. As above-average radiation levels were detected in some Japanese agri-food exports, countries began imposing bans. Australia, Malaysia, China, Taiwan, the United States and Singapore have imposed bans on agricultural food imports from the regions of Fukushima, Gunma, Ibaraki and Tochigi, whereas India has imposed a blanket ban on all food imports from Japan.

The crisis highlighted the importance of technology for cost efficient radiation testing and detection. The laws governing product labeling may also be changed to incorporate more information about potential food contamination. The increased business in food inspection and labeling may, ironically, pose a business opportunity for Japanese companies, who have strengths in this field. 

The Online Retail Industry

As Japan embarked on electricity rationing to protect the electricity grid run by the beleaguered TEPCO , shopping centers and public transport facilities that were unscathed by disaster were made to cut operating hours. Coupled with a heightened consumer preference for staying indoors for fear of exposure to radiation, the online retailing industry reported a jump in sales during this period. Online shopping has been popular in Japan for over a decade, as virtually the entire population has fast internet access and Japan hosts some of the world’s most sophisticated internet shopping malls, like rakuten.com The Tohoku disaster may be remembered as a key inflexion point in the continuing surge to dominance of online retailing. 

The Disaster Mitigation Industry

Sitting on the “Pacific Ring of Fire”, Japan has been battling natural disasters for centuries. The intensity of the damage seen this time around has led to more interest in technology that can provide more accurate and timely forecasts of the magnitude and intensity of natural disasters. 

Telecommunication companies, government and Seismic Warning network operators are co-operating to better integrate their warning systems, so as to allow more reaction time to people living in disaster prone zones. 

Political and Environmental Implications

Migrant Workers

The Japan International Training Co-operation Organization (JITCO), the agency that oversees the foreign worker trainee program, estimates that more than 70 percent of its 150,000 temporary workers in the Tohoku region have left since the disaster and have not returned. Since they were never allowed to settle down in Japan, there were no reasons for them to stay on in the face of disaster. This disrupted a great deal of industrial production in Tohoku. 

This uncomfortable fact has prompted calls for allowing more foreign workers to become legal residents on employment permits. Immigration has been a sensitive topic in Japan, but recent events will add to the growing feeling that an aging society like Japan has to take in more immigrants to maintain economic dynamism. 

Trade Barriers

Although Japan is a member of the WTO and a major global importer, many forms of trade protectionism are still in place. According to the owner of a local construction company, the estimated bill for rebuilding homes in Miyagi, the worst-affected prefecture, is double of what it should be, due to barriers to importing cheap Taiwanese timber, which Japan imposes to please domestic producers. When extensive rebuilding needs to be done, the lower prices of foreign products may do more good than harm. Therefore, the Tohoku disaster has raised pressure on the Japanese government to rethink protectionist policies. 

Some have even extended this into calls to create a special economic zone in the north-east that is free from all forms of trade protectionism. Although recent talks to form a free-trade area called the Trans-Pacific Partnership have been postponed, there are still hopes for reform. The Tohoku disaster may yet prove to be a catalyst towards “freer” trade in Japan.

Online retail reported a jump in sales during the Tohoku disaster period.
Environmental Implications

Nuclear Energy

Japan draws about a quarter of its electricity from nuclear power, with over 50 operating nuclear reactors producing around 50 gigawatts of electricity. While environmental groups have long decried the risks of nuclear power, the Fukushima nuclear crisis has propelled these concerns to a whole different level. As TEPCO and the government struggled to prevent a runaway core melt-down and a disastrous leakage of radiation into the atmosphere, the safety of living near a nuclear reactor, which most had taken for granted, was called into question. 

Partly as a reaction to the Fukushima crisis, China, along with Germany and Switzerland, has put its nuclear power program on hold, with Germany pledging to phase out existing reactors. Other countries including Israel, are reconsidering the use of nuclear power as well. Prior to Fukushima, countries as diverse as Iran, Indonesia, Vietnam and Singapore had announced that they were looking into the nuclear power option. There is now likely to be more public opposition to such plans, and not only from environmental groups. 

On a more positive note, the accident in Japan has caused a rush to review nuclear safety standards in most of the world’s operational nuclear plants. Nuclear energy regulators are starting to take more seriously the question of safeguarding reactors against freak earthquakes and tsunamis. The extra safety precautions will increase the cost nuclear power by about 10%. 

Renewable Energy

Due to the accident at Fukushima, Japan scrapped a national energy policy plan which required nuclear reactors to meet half of Japan’s energy needs by 2030. Instead, making (non-nuclear) renewable energy one of the main energy sources is now the goal of the government. In order to fulfill this, 10 million homes will be solar-powered and intensive research and innovation (R&D) will be done to decrease the cost of solar power generation. The government will also allow the building of wind-power generators in national parks. 

These changes will increase the demand for solar and wind energy – surely a boon to the renewable energy firms which are currently struggling. If the government lives up to these promises, it is possible that Japan will be able to catch up with China and the US in the solar energy industry. 

A second capital for Japan?

The concept of disaster resilience is being widely debated in post-Tohoku Japan. Many voices have raised the prospect of a disaster of similar magnitude hitting the Kanto (Tokyo-Yokohama) area in the next decade or so. Many fear that the consequences of such an event would be unfathomable. 

Japan is now toying with the idea of building a second capital that operates parallel to the main capital. If a disaster befalls the main capital, the second capital is then able to take over the main capital and operate as usual. If such a move becomes reality – and this is a big if – it would also boost the section of public opinion that is calling for a change to the old ways of doing things, centered on close links between big government and big business.

Over 70 percent of the region’s 150,000 temporary workers have left since the disaster and not returned.
Conclusion

With the benefit of hindsight, the great Tohoku earthquake will not be remembered as the event that dealt a body blow to the Japanese economy, let alone Japanese business. Growth and corporate performance are rebounding. Japanese companies, the people of Tohoku and even the government showed great resilience and ingenuity in bouncing back. Japan’s economy will grow again in the third quarter and Tohoku will soon be awash in public funds for reconstruction, so much so that it may see inflation in the months to come, in contrast to the general deflation that plagues Japan. 

The legacy of Tohoku, however, will be long-lived. These include a boost to corporate diversification of production locations; some moderation of the JIT pattern in manufacturing; deepening investment in safety of foodstuffs, buildings and nuclear reactors; and, perhaps most significantly of all, a fundamental global rethink about the long-term viability of nuclear power, or at the very least of locating nuclear reactors close to factories, towns and cities. 

As for the final legacy that many had hoped for, of institutional and political reform in the world’s third largest economy, this remains an open question. The tragedy does not appear to have directly sparked any grassroots movement favoring reform. However the short-term aftermath of such tragedies often sees more questions being raised than answers. And this has been seen in the post-Tohoku debate around permitting more legal residents and lowering protectionist barriers. 

As the public spending crunch occasioned by Tohoku intensifies, the disaster may yet crystallize minds around the banner of institutional reform first raised by former Prime Minister Koizumi Junichiro. And that would be good for Japan and the world.

Due to the Fukushima crisis, Japan scrapped a target for nuclear reactors to meet half of Japan’s energy needs by 2030.
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