Japan & the World after the Quake

March 23, 2011

Robert Dujarric
, Director, Institute of Contemporary Asian Studies, Temple University, Japan Campus
Ambassador Shigeyuki Hiroki, Consul General of Japan in New York
Takashi Imamura, Vice President & General Manager, Marubeni America Corporation, Washington, D.C.
Paul Scalise, Non-Resident Fellow at the Institute of Contemporary Asian Studies, Temple University, Japan Campus


A distinguished panel of experts from academia, business and government met at Japan Society to discuss the March 11 earthquake and tsunami, the ensuing accident at the Fukushima nuclear plant, and the meaning of these events for Japan and its relationships with the rest of the world.


Robert Dujarric of Temple University's Japan campus said that when the quake struck, he was traveling on a Shinkansen train through the Nagano tunnel. Thanks to Japan Rail's earthquake-warning system, the train stopped even before the tremor reached them. After a time, the train continued on to a station on the Pacific coast. At 7 the next morning, the passengers were put on a local train to Tokyo. "It took eight hours, but still we arrived there, which, when you think of it, the day after a quake it’s a very impressive performance."


"For the economy, obviously the Kanto area is the key issue," Mr. Dujarric said. If the Fukushima nuclear plant is brought under control quickly and power supplies to the Kanto area are restored to fairly normal levels, "in the medium term the impact will be fairly limited." Should electric power shortages persist and fears of radiation linger, however, the economic impact could be "quite negative."


The response of Korea to the disaster "reflects a dramatic change in Korean attitudes towards Japan," he said. The Korean government sent in rescue squads and other aid. Korean "comfort women," who had been holding weekly demonstrations to demand compensation for their treatment during the war, decided to raise money for the victims in Japan. These are positive signs for Japan's influence around the world, which "is to a certain extent a function of its ties with the rest of the region."


Ambassador Shigeyuki Hiroki, Japan's Consul General in New York, underscored the magnitude of the March 11 disasters, which struck a coastline 250 miles long and left ten times as many people lost or missing as Hurricane Katrina did in 2005.


As the Japanese government worked nonstop to save lives, to support the victims, and to minimize the impact of the accident at the Fukushima plant, "people’s spirit in the face of such unprecedented catastrophe was extraordinary. For me it has confirmed the essential character of the Japanese people, the remarkable resiliency and teamwork at the heart of Japan’s society," the ambassador said.


Japan Society's Earthquake Relief Fund has raised nearly $2 million from some 7,000 donors [and as of June 8, 2011, over $8.6 million from some 20,000 donors], and there has been an "outpouring of sympathy and support for the victims" on the part of the people of New York City. "So many people of all walks in life have expressed a simple desire to help. This trying time has reaffirmed the bonds of friendship we share."


The human toll increases day by day, and casualties are expected to rise far above 25,000, Takashi Imamura of Marubeni America said. The Japanese government estimates that damage to roads, homes, factories and other physical assets will exceed ¥25 trillion, or some 6 percent of Japanese GDP. When losses due to the power outage, the nuclear plant accident, and radiation contamination of water and agricultural products are added in, he estimates that the total may reach ¥30 or ¥35 trillion.


Reconstruction spending usually more than makes up for drops in production and demand in regions affected by disasters, Mr. Imamura observed. But the March 11 catastrophe may depart from this pattern. TEPCO, for example, calculates that Tokyo-area power outages caused by damage to the Fukushima nuclear plant may reach as much as 25 percent this summer during peak usage periods.


How to pay for the rebuilding is an open question. One possibility is a reconstruction tax on fossil fuel, an idea he favors. Another is a rise in the consumption tax rate; the big concern is "the uncertainty of Japanese politics."


Aggressive fiscal and monetary policies will support economic recovery in the second half of this year, Mr. Imamura said. He expects GDP growth of about 1 percent this year and 2.5 percent next year. "However, it does not mean the establishment of the structure of sustainable growth in the Japanese economy. A temporary increase in public debt is inevitable, but from the postponement of the fiscal reform may cause a rising Japanese government bond yield in the near future. To avoid this situation the government would have to cut expenditures and may have to hike some tax rates for the next year."


For the Tohoku area, it's essential "to restore the stable life of residents" as soon as possible. However, "the simple restoration of the streets and the buildings is not the solution." What's needed is "reconstruction of the industries and society" to address problems of aging demographics and falling birthrates in many parts of the region.


It's been said that the impact of the disaster on overall Japanese GDP "will be minimal at best," because the economies of Miyagi, Iwate and Fukushima prefectures are based largely on agriculture and fisheries, noted Paul Scalise, an energy economist and non-resident fellow at Temple University's Japan campus. But the conventional wisdom may not apply if there is an electricity crisis.


Including both nuclear and conventional plants, over 50 percent of Tohoku's capacity, and over 34 percent of TEPCO's, is currently offline. Even before the March 11 quake, significant fractions of the two companies' power generation capacity were offline, including some damaged in a 2007 earthquake and some idled for regular maintenance.


Considering the nation as a whole, the fraction of downed nuclear capacity that's offline is small, only 3.5 percent, Dr. Scalise said. The regional picture is more complex. There is a frequency mismatch between western Japan's electricity system, which operates at 60 hertz, and eastern Japan's, which includes both TEPCO and Tohoku Electric and which operates at 50 hertz. This means that virtually none of the electric energy generated in the west, some 114 gigawatts in all, can be channeled to the east. Self-generation installations lack network connections. New entrants in the electricity generation market are too small to make an impact.


TEPCO's reserve margins have been dipping low for years in summer, as low as 2 percent, he said. Today, the company's reserve margin is vastly lower—below negative 24 percent. Tohoku Electric has implemented rolling blackouts, and TEPCO is beginning to do so as well. Together, the two regions have 33 million residential customers and 3 million industrial customers, and consume 40 percent of Japan's kilowatt hours sold.


A worst-case scenario, ironically enough, would be that the nuclear crisis is contained quickly, whereupon residential and industrial demand both go back up. Under a base-case situation, which Dr. Scalise said matches what he himself expects, the nuclear crisis lingers, Fukushima plants stay offline, and residential demand stays low; conventional power units come back in a minor way this year, with the rest back online in 2012. "Reserve margins would be anywhere between negative 4 and negative 20 percent, but you’ll still have rolling extensive blackouts."


Both TEPCO and Tohoku Electric "acknowledge that they are in no political hurry whatsoever to bring their remaining nuclear reactors back online," he concluded. "How badly these capacity deficiencies will impact GDP growth will largely depend on the end to the nuclear crisis, the ability to bring new and damaged capacity online, of which I’m highly skeptical, and encouraging demand growth to stay below company projections and historical trends."


You have referred to two potential funding methods, a reconstruction tax and a reconstruction bond. Isn't there a third way, namely to allow private capital, domestic or foreign, to come in and bid for the rights to redevelop toll roads, port facilities and so forth?


The reconstruction needs to be completed on an emergency basis, and in Japan the quick way to get this done is to use public funding first, Mr. Imamura responded.


It's hard to be optimistic about the ability of politicians, bureaucrats or TEPCO officials to try novel or unorthodox procedures, or to somehow get around their own regulations to avert an electricity crisis. What is your outlook on how the political situation is going to affect this reconstruction?


TEPCO has called for the government to build a 300-megawatt liquid natural gas-fueled conventional thermal plant now, waiving otherwise stringent environmental regulations, Dr. Scalise said. "The Kan administration, not surprising, has stayed silent. They say nothing. METI has said nothing. The Ministry of Finance has said nothing. And even if someone were to say anything, frankly I don’t think it matters, because we’re only talking about 300 megawatts. You would have to build multiple plants over such a quick period of time to deal with the reserve margin issue."


"This will require an enormous amount of leadership on the part of the Democratic Party of Japan and from Kan Naoto. And I would like to be optimistic that things will change. However, having studied Japan for 20-some-odd years, the idea that a decision could be made quickly on anything seems rather naïve, and therefore I would have to caution that if nothing is resolved by August, again, we will have a serious problem on our hands."


Mr. Dujarric said that he's somewhat more optimistic. "When you say it takes three to five years to build a plant, if the leading exporters of Japan are really hurting, the employees are basically on furlough and not getting paid, certainly the government has an obvious political incentive in speeding up the process."


He added, "And the truth is if you already have to build things quickly, you can actually do it quickly in Japan. It’s probably a good place to do it, because it has a very effective labor force. It has an industrial structure that is still very much standing."

What’s the reaction in Japan to how President Obama has acted in this crisis?

"The U.S. military immediately went into rescue mode, sent a large number of ships and Marines to help," Mr. Dujarric said. "The U.S. surely did not seem to panic. So, I think the reaction was very positive, but it’s only a really small part of the story. This is fundamentally a domestic Japanese story. And if you read the American press on a lot of what the U.S. is doing, that is only 1 percent of what’s happening there."

—Katherine Hyde
Topics:  Business, Policy

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