The Lessons of the Great Tohoku Earthquake and Its Effects on Japan’s Economy (Part 8)

Rebuilding the Japan of Tomorrow

Risaburo Nezu
Senior Executive Fellow

May 31, 2011 (Tuesday)

1. The Damage is not Too Great to be Absorbed

The Cabinet estimates the losses to physical stock due to the recent earthquake at ¥16-25 trillion. Additionally, GDP is expected to see a 1-1.5% reduction in the short term. However, we must not forget that Japan has immense resources. Japan’s current GDP is ¥500 trillion, but following the Lehman Shock it fell a total of ¥48 trillion, or approximately 10%, from the first quarter of 2008 to the first quarter of 2009. When we take into account the emotional damage and harmful rumors, which cannot be measured in money, there is no doubt that the losses due to the earthquake exceed the estimates, but even when damage to physical stock and flow are combined, it amounts to less of a financial drop than that due to the Lehman Shock. On the other hand, at the end of 2010, Japanese corporations had more than ¥200 trillion in cash and savings. Banks’ loan-deposit ratio is below 70% and they have plenty of reserves for loans, and large corporations’ financing is abundant. Dire straits might be avoided if the government would implement the proper policies, such as credit enhancement for medium and small companies who had factories and offices swept away or had clients disappear.

2. First, Break Up the Foreign Exchange Reserves to Deal with the Problem

The problem is the financial state of the world’s most indebted country, Japan. ¥5 trillion in funds is urgently needed to compensate those affected by radiation and to build temporary homes and rebuild lost infrastructure. It has been proposed that Japan issue special national bonds to raise funds for rebuilding, but in the end this would still be a national debt. I believe that due to Japan’s over-saving there is still plenty of room for issuing national bonds, but more importantly we must first consider breaking up Japan’s foreign exchange reserves, which are currently at ¥90 trillion, second only to China. Breaking off ¥5 or 10 trillion would not have a very large effect on national trust in the yen. The fact is that, in Japan’s case, the market decides exchange rates and there are no national bonds in foreign currency, and so there is no need for foreign exchange reserves in the first place. We should use the reserves without hesitation. However, the majority of Japan’s foreign exchange reserves is in American Department of the Treasury securities, and if Japan were to buy these back all at once it would result in an even greater appreciation of the yen. It is therefore necessary to exercise discretion.

The current-account balance is currently trending downwards, but even so it is holding at a surplus of well over ¥10 trillion. As a result of the recent disaster, a temporary stoppage of exports is expected, but a fall into the red over the long term is not. In fact, it would be favorable if the surplus decreased somewhat and the yen were depreciated. Moreover, private corporations and individuals have as much as ¥450 trillion in overseas assets. True, Japan does have ¥287 trillion worth of debt to foreign countries, but on balance Japan is the world’s largest holder of foreign assets. For Japan, the damage estimates that are being quoted currently are not the sort of numbers that Japan cannot absorb, and the market agrees; the yen grows increasingly stronger.

3. Using Untapped Resources

Throughout Tohoku, 30,000-40,000 hectares of fields were swept away by the tsunamis resulting from the recent earthquake. Some tracts of farmland were even completely submerged beneath the sea. This farmland which was covered by saltwater is currently unusable for agriculture and will take several years to recover. However, on the whole, Japan has 39,000 hectares of land which is no longer being cultivated as a result of the longstanding policy to reduce cultivated acreage. There is also unused farmland in the vicinity of the damaged areas. Instead of returning to areas that may be hit by tsunamis again in the future, we should be thinking about reusing farmland that was once cultivated but now lies fallow.

Houses are a similar story. Nearly 140,000 homes were utterly destroyed in the disaster, but there are as many as 7,000,000 empty houses in Japan. Not all of them are habitable, but there is no shortage of houses for those in need. Building temporary houses is all well and good, but we should immediately make use of empty houses as a temporary measure.

4. Building New Communities

The Pacific coast of the Tohoku region, in particular Iwate and Miyagi prefectures, took the heaviest damage from the recent earthquake and tsunamis. This area has suffered from a considerably decreasing and aging population for some time. Settlements are scattered over a wide area, and there are quite a few households consisting of either an elderly couple or an elderly person living alone. Those hardest hit by the recent disaster were just such elderly people living in mountain backwoods. The snowfall this winter was especially heavy, and there were many households that were not even able to clear the snow from their roofs. Human settlements can only function if there is a balance between the young and the elderly, and even if the recent disaster had not come to pass, such areas where depopulation and aging had advanced to the extreme were likely at their limit. Therefore, when rebuilding from the disaster, it is not enough to simply “return things to the way they were,” but rather we must use this as an opportunity to begin rebuilding local communities that can sustain themselves in the long run. For this reason, we should act with deliberation and proper preparation when rebuilding communities instead of undertaking things in a slapdash manner.

The basic issue in need of correcting is having settlements made up of only elderly people scattered over a wide area. As things stand now, basic services such as hospitals, schools, post offices, and delivery services will soon cost too much and become unsustainable. Furthermore, physical infrastructure such as roads, water lines, and communications networks become incredibly inefficient when dwellings are dotted across the region.

The Independent Settlement Area Initiative（Teiju Jiritsuken）announced by the Ministry of Internal Affairs and Communication in 2008 was proposed to deal with just such a situation. According to the initiative, central cities of more than 50,000 people would gather basic services such as medical, care-giving, and education and act as a nucleus connecting surrounding towns and villages and their economies. Businesses aimed at aiding in rebuilding after the disaster should also be based on a similar idea. We must have systems in place such that if another disaster strikes, central cities will take responsibility for a predetermined area and deal with any problems that arise.

This also presents Japan with a chance to escape from its small-scale subsistence farming of the past. Rebuilding its agriculture will be a long and hard road for Japan. There are likely many farmers over 60 years old who are thinking about leaving the farming business after the disaster. If we can use this opportunity to intensify farmland and increase productivity even slightly, this would reduce the burden on Japan’s citizens. Regardless of the Trans-Pacific Partnership (TPP), increasing agricultural productivity is an unavoidable issue for Japan. We must stimulate efforts towards intensification using such methods as limiting rebuilding support to full time farmers with more than 1 hectare of land. In particular, by separating residential and arable land and having farmers live in urban areas, large farm machinery would be easier to use and efficiency increased. The cluttered landscape of Japan’s farmland bears witness to the fact that Japan’s farmland intensification is proceeding too slowly.

5. Put the Debates that Split the Country on Ice

Before March 11, Prime Minister Kan decided to put his political life on the line to tackle the two great issues of a unified reform of taxes and social security and participation in the TPP. However, both the ruling and opposition parties were unable to give ground, and it is difficult to find any points of compromise. In order to quickly work out emergency measures for post-disaster rebuilding, these two pending problems will have to be shelved, and Prime Minister Kan should make an honorable retreat. These two matters would have been wrapped up by June somehow, but they are in fact not such urgent issues.

First of all, the time limit for “tax and social security” is not yet up. Perhaps it’s because he used to be the Minister of Finance, but apparently Prime Minister Kan is worried that Japan will fall into dire straits as Greece has. However, Japan’s situation is completely different from Greece’s. Even after it became clear that Japan’s financial deficit would grow ever larger due to rebuilding after the great earthquake, far from the interest on national securities showing any signs of rising, the yen continued to rise and a joint intervention of major developed countries has been formed to suppress its appreciation. The market does not appear to be anywhere near panicking about finance and needing to do something—anything about it. The opposition party wants to scrap child support, farmer income compensation, and making high-speed trains free and using those funds for rebuilding after the earthquake instead. There are many parts of the underlying philosophies of these policies that both parties agree on, but much work still needs to be done on specific implementation, and therefore the ruling and opposition parties should put off the issues for one year and deliberate on them again at that time. Alternatively, they should raise them as points of debate at the next election and once more allow the people to voice their opinion.

I have long asserted that Japan should promote the free trade of agricultural produce, but at this time we should put off the TPP debate. The Tohoku area, which was damaged in the recent disaster, is highly reliant on agriculture. We should not be adopting policy that will stir up anxiety about the future before we have even managed to rebuild. The opinion of the proponents of joining the TPP is that Japan should join in the negotiations at an early stage in order to gain even a slight advantage as they move forward. However, based on my experiences in conducting actual trade negotiations within Japan’s government, even if the great earthquake had not happened, Japan still would not have wielded the negotiating power to affect the contents of the TPP. This is because the other countries know that Japan does not have the resolve to play the agricultural liberalization card and always thinks only of minimizing liberalization in its negotiations. Therefore, even if Japan had participated in negotiations in form, in practice the only possible outcome is that the other countries would have come to an agreement and then forced Japan to swallow their decision. It is unfortunate, but that has always been the reality of trade negotiations in agriculture. In which case, Japan should stop with the useless debates and concentrate its energy on rebuilding its economy.

6. All of Japan Must Share the Hardship

Due to the stoppage of the Fukushima nuclear power plant, power supply and demand will become quite severe in the Kanto area. Even at the best of times, TEPCO was barely able to supply enough power to its jurisdiction during midsummer. Even with accommodation from other areas, power saving, and full operation of thermal power plants, planned power outages will be unavoidable. Considering the future of Japanese industry, securing power for industrial use should be given priority even if this has slightly adverse effects on citizens’ way of life. There is more room for energy saving at home and at the office than there is in industry. This summer, we should set the air conditioners in every single building at 28℃ or above. The insides of stations and buildings have become rather dark, but this does not really present much difficulty. Industry should also try such things as shifting part of its operations to the weekend; this would result in easing some of the rush hour crush as well. If we use elevators and escalators as little as possible and instead use the stairs, we can improve our health as well.

A portion of our water and vegetables have been contaminated. Let’s act calmly. Babies and infants should be given priority for drinking safe mineral water, and elderly people should not hesitate to drink the tap water, which has been guaranteed to be safe. Starting with social security, Japan’s elderly have been given special treatment in many ways, while young people have been given the cold shoulder. We should use this opportunity to change public awareness so that the young generation, which will bear Japan on its shoulders in the future, will show more interest. Let’s spread the idea that panic buying and the buying up of goods are unsightly actions. Japanese people are now starting to think of what they can do. The world is holding its breath and watching as Japan strives to overcome this catastrophe. The world’s media have been deeply moved by Japanese people’s fortitude and spirit of cooperation. Even at the nuclear power plant, where the danger continues unabated, those who work desperately at their posts are in fact receiving high praise from overseas. Many heroes will no doubt be born from this terrible scene. Now is the moment of truth.

This series is hereby completed.