As the havoc wreaked by the massive earthquake and ensuing tsunami last week becomes clearer day by day, one critical problem for Japan’s already fragile economic recovery has emerged: a lack of electricity.
In the aftermath of the devastating magnitude 9 earthquake on March 11, the world’s third-biggest economy has been reminded that it is poor in natural resources and is paying a heavy price for its strong dependence on nuclear energy.
The scale of the impact on the economy is not yet clear, but many analysts agree the longer the economy goes without sufficient electricity, the deeper it will fall.
Ports, roads and other infrastructure were ravaged by tsunami, with manufacturers suspending operations in affected areas. While struggling to deliver aid supplies to victims, the government of Prime Minister Naoto Kan is also battling a deepening crisis at a nuclear power plant in Fukushima Prefecture.
The troubles at the Fukushima No. 1 plant, where cooling failures and even high-level radiation were reported, have left its operator, Tokyo Electric Power Co., unable to provide sufficient electricity to Tokyo and several surrounding prefectures and forced it to implement power rationing for the first time in its history.
In the Kanto region, centering on Tokyo, there is a power shortage of some 25 percent that could become a “large bottleneck in the economy,” Ryutaro Kono, chief economist at BNP Paribas Securities (Japan) Ltd., said in his report.
The areas served by Tepco account for some 40 percent of Japan’s economic output.
“With the bottleneck, industrial production would significantly fall, while deterioration in the sentiment of companies and households would seriously curb business spending, private consumption and housing investment,” Kono wrote.
BNP Paribas predicted that in the wake of the quake, the economy would contract 0.9 percent in fiscal 2011 starting in April, reversing earlier projected growth of 1.6 percent.
Industrial output has been on the mend after a recent fall attributed to slowing exports and weakening domestic consumption resulting from the diminishing effects of fiscal stimulus measures, such as the Eco-point program for buying energy-efficient vehicles.
But as Kan’s administration calls on the public to save electricity, concerns about downturns in production by manufacturers are widespread among economists.
“If power outages or efforts by large corporate users to spare electricity continue for a lengthy period, then production would inevitably come under strong downward pressure,” said Lee Chiwoong, economist at Goldman Sachs Japan Co.
In the event power rationing lasts through April as scheduled, real gross domestic product will be pushed down by 0.5 point. If it lasts through June, real GDP will be driven down 0.8 point, Lee said.
The three prefectures severely damaged by the earthquake — Iwate, Miyagi and Fukushima — account for around 4 percent of GDP, almost the same as Hyogo Prefecture alone, according to Meiji Yasuda Life Insurance Co. Hyogo was staggered by the 1995 Great Hanshin Earthquake.
But the power shortages stick out as a considerable difference between the two incidents, said Yuichi Kodama, chief economist at the life insurer. “We are having a serious power shortage in the Tokyo metropolitan area, and that is the biggest problem.”
The power shortage amid the nuclear crisis in Fukushima could be covered by Tepco, which would consider reopening some of its suspended thermal power plants, Kodama said. The approach of spring will also help because people will consume less electricity as temperatures warm.
However, things could get complicated again in the summer, when electricity demand usually peaks with the start of air conditioner use, he said.