A Contrarian View on Japan: Seizing Opportunity from Tragedyby Marcus Noland | March 14th, 2011 | 10:04 am
The earthquake and tsunami that devastated the Tohoku region of northern Japan took place against a challenging economic backdrop for Japan. Before tragedy struck, the country was already facing a slowing economy, fiscal strain, and deflation. The costs of this disaster are still being counted, and the nuclear power plants represent a wildcard. Yet rebuilding will occur and if handled adroitly, offers some grounds for hope.
The dimensions of the earthquake are still uncounted. The city of Sendai, home to more than 1 million people has been destroyed. The death toll may reach tens of thousands. The region and Japan as a whole face continuing uncertainty associated with damaged nuclear power plants and ongoing aftershocks.
First, however, although it is hard to imagine amid the stream of images of almost unimaginable destruction, it could have been far, far worse. The city of Sendai is relatively isolated; in American terms it might be compared to Kansas City or Denver. If the earthquake had hit 200 miles to the south it would have devastated Tokyo, a metropolitan area of 35 million residents and the center of Japanese political and economic life, in American terms Washington and New York combined. And again, not to minimize the destruction in Tohoku, it is not the economic center of Japan; it accounts for less than 4 percent of GDP. The industrial heartland is formed by a band that extends south from Tokyo along the Kanto plane through the Kansai region to the southwest, and to the island of Kyushu. If the earthquake had occurred 400 miles to the south the economic destruction would have been multiplied. One continuing risk is disruption to power generation and distribution which could adversely affect activity beyond the immediate earthquake and tsunami affected region.
For the last 10-20 years Japan has experienced an extraordinary concentration of economic activity in Tokyo. Hundreds of Japanese corporations have moved their headquarters from cities like Osaka. Rebuilding Sendai will not reverse this process, but at the margin it could contribute to a greater dispersion of economic activity across the country. If pursued creatively, such a dispersion could contribute to the formation of a growth pole in northern Japan.
In the context of the need to rebuild, considerable commentary has focused on the fiscal constraints that Japan faces. But in much of the public discussion these debt problems are exaggerated. Gross public debt is a startling 215 percent of GDP. But much of this debt is owned by government entities and is backed by assets, such as toll roads with real economic value. The more relevant net debt figure is about half as big, 110 percent of GDP, still a large number, but not twice GDP.
Moreover, it is unlikely that ownership of this debt is footloose. Ninety-five percent is owned by Japanese citizens, not London hedge funds, and the Japanese appear to be content to hold it. As a function of revealed preferences, Japanese capital markets are insulated relative to those in, for example, the United States or Europe. It is highly unlikely that Japanese citizens will dump this debt if it increases marginally to rebuild the city of Sendai. The government of Japan has greater room for maneuver in this situation than many other governments would.
One of the reasons that Japanese debt levels are so high is the legacy of decades of wasteful spending of public investment: bridges to nowhere, expensive port facilities for small fishing villages, roads with little traffic, all borne of the disproportionate impact that lightly populated districts have exerted over national policy. This pattern will likely end, temporarily at least. Money will have to be redirected from these wasteful endeavors to projects associated with rebuilding Tohoku — with much higher rates of return as a consequence. The quality of public investment will likely be improved, perhaps permanently if the episode contributes to a fundamental rebalancing of Japanese politics.
For the last half century, Japan has had a dominant party political system with the Liberal Democratic Party (LDP), governing almost continuously, in large part because of its bedrock support in the rural areas. The government’s response to this emergency could have permanent effects on the structure of Japanese politics. If the incumbent Democratic Party of Japan (DPJ) does a very good job in handling this emergency, the episode could reassure voters that the Democrats represent a credible alternative to the LDP and cement a two party system of truly contestable political power. However, if the government does a poor job in the crisis — a Japanese version of the Bush Administration’s performance during Hurricane Katrina — it could send voters flocking back to the LDP, effectively ending this most recent episode of political competition and re-establishing the single party-dominant system. The stakes are huge.