The 9.8 magnitude earthquake off the shore of Sendai in northeast Japan and the subsequent tsunami (with waves as high as 10 meters) brought indescribable anguish and casualty to the people of the Land of Rising Sun. The Japanese suffered a major blow in terms of human life (2414 confirmed deaths as of the latest count, with thousands injured or missing, and around 450000 people homeless and in evacuation sites). This disaster also inflicted damage to the world’s third largest economy. But by how much has the damage been done in Japan’s purse, and what would they do then?
Estimates of the costs of damage run up to around $ 171 billion, making the earthquake potentially the world’s costliest disaster ever. This scenario put extra strain on an economy that has been ailing for 20 years and has recently lost out to China. And we’re not yet considering the substantial humanitarian and production toll the earthquake took, and also the hysteria over nuclear meltdowns in reactors rendered derelict by the disaster. It has come to a point that the Japanese had to resort to rotational blackouts amid shortages in water, electricity, and other supplies.
The Nikkei Stock Maket took a major hit as it closed 6.18% lower on Monday, the first day the market reopened after the disaster. As a response, the Bank of Japan, the nation’s central bank, pumped 15 trillion yen (around $183 billion) into the economy to address the financial needs of the reconstruction and humanitarian effort. Foreign promises of assistance abound, but some analysts are positive that Japan can stand on its own and heal itself, therefore rendering aid as symbolic gestures. Even renowned economist Jeffrey Sachs is confident that Japan’s economy will bounce back right after restoration efforts have been done.
It certainly helped that Japan invested $1 billion on its early warning systems for earthquakes and tsunamis, therefore saving many lives in the process. And if history is any precedent, Japan has an extensive experience in bouncing back from the worst of scenarios, from being way behind before the Meiji Era to rising from the rubble of Nagasaki and Hiroshima of World War II.
Japan’s Debt Sustains a Deflationary Depression
Last year, Japan’s gross government debt was 220 percent of gross domestic product, according to the International Monetary Fund, by far the largest ratio of any Group of Seven country. All governments lend back and forth among official entities so that their gross debt is bigger than the net debt held by non-government investors, and Japan does this more than other developed countries. Still, on a net basis, Japan’s government-debt-to-GDP ratio is rivaled only by Italy’s and leaped to 113 percent in 2011 from 11.5 percent in 1991.
Standard & Poor’s has cut the Japanese government-debt rating to AA minus and Moody’s Investors Service cut its rating to Aa3. On May 22, Fitch Ratings reduced Japan’s sovereign grading to A+ and said the government is taking a “leisurely” approach to dealing with the nation’s debt. Meanwhile, loans from Japanese banks have dropped precipitously since the early 1990s. That was partly due to the write-offs of bad real-estate loans. Even so, the revival of borrowing in recent years has been minimal.
Japan’s traditionally low unemployment rate jumped from 2 percent in the early 1990s to 4.6 percent in April of this year. The male labor-force participation rate ceased its post- World War II decline in the bubble 1980s, though the downward trend has accelerated again since the early 1990s. The female participation rate rose from the late 1970s until the early 1990s as many women decided that working and remaining single were preferable to being confined to the home and rearing children in a male-dominated culture.
Despite aggressive monetary policy since the early 1990s, Japan has suffered bouts of deflation. The two decades of economic stagnation were compounded by the huge earthquake and devastating tsunami last year. The economic disruptions and loss of nuclear-power generation remain considerable. Rebuilding will create jobs and economic activity, but it will simply take things back to where they were, and at tremendous cost to the government, insurers and those who lost property, income and jobs, to say nothing of the thousands of lost lives.
Happy time is unlikely to return.