Hope for Japan

The devastation in Japan has killed tens of thousands.  But rather than focus on the deaths and other bad stuff (nuclear power plant problems, lack of food, water, and shelter, etc.), I want to talk about how Japan can recover.

According to a report from Reuters, advanced economies cope better with disasters.  Although Japan’s economy has been weaker in recent years, it remains one of the wealthiest nations:

The instinctive reaction when viewing the extensive damage and frantic efforts to secure damaged nuclear reactors is to assume economic havoc will follow.

But researchers who have studied similar disasters in rich countries reach a reassuring conclusion: human resilience and resourcefulness, allied to an ability to draw down accumulated wealth, enable economies to rebound quickly from what seem at first to be unbearable inflictions – be it the September 11, 2001, attacks on New York or Friday’s 8.9-magnitude earthquake, the worst in Japan’s history.

Japan itself provides Exhibit No. 1 in foretelling the arc of recovery. A 6.8-magnitude temblor struck the western city of Kobe on January 17, 1995, killing 6,400 people and causing damage estimated at 10 trillion yen, or 2 percent of Japan’s gross domestic product.

The importance of Kobe’s container port, then the world’s sixth-largest, and the city’s location between Osaka and western Japan made it more significant for the economy than the more sparsely populated region where the latest quake and tsunami struck. Extensive disruption ensued, yet Japan’s industrial production, after falling 2.6 percent in January 1995, rose 2.2 percent that February and another 1.0 percent in March. GDP for the whole of the first quarter of 1995 rose at an annualized rate of 3.4 percent.

“Despite the scale of the disaster, it is hard to find much evidence in the macroeconomic data of the effects of the Kobe earthquake,” said Richard Jerram, chief Asian economist at Macquarie in Singapore and a veteran Japan-watcher.

Indeed, Takuji Okubo, chief Japan economist at Societe Generale in Tokyo, noted that Japan’s economy grew by 1.9 percent in 1995 and 2.6 percent in 1996, above the country’s trend growth rate at the time of 1.5 percent. Private consumption, government spending and, especially, public fixed investment all grew above average in 1995 and 1996, Okubo said in a report. By analogy, the medium-term impact on growth from the latest quake was also likely to be positive, he said.

Today’s circumstances are, of course, different. Japan’s economy has floundered in the intervening 16 years and its public finances have deteriorated. On paper, the country, is perhaps less well prepared at this stage of the economic cycle to pick itself up off its feet.

But Mark Skidmore, an economics professor at Michigan State University, attaches greater importance to a rich society’s capacity to constantly adapt to the risks it faces. In the case of Japan, prone to regular earthquakes, this means improving its disaster response systems and adopting the latest techniques to help buildings withstand shocks.

Most of the damage wrought in Japan was by the ensuing tsunami, for which there was no time to prepare, and not by collapsing buildings – even though the quake was 1,000 times more powerful than the Kobe one.

“We don’t know yet how devastating this is going to be economically, or even in terms of human casualties, but Kobe was able to rebound very quickly and I think there is the same potential here,” Skidmore said in a telephone interview.

There is still a lot of hope for Japan.  The Japanese economy will rebound, and other nations will assist with the cleanup.

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