Crisis cost and opportunity

by Takamitsu Sawa

The most powerful earthquake in the nation’s history struck the northeastern part of Japan on March 11. Even more devastating than the quake itself was the tsunami that followed, as it took more than 20,000 lives and destroyed countless structures.

Radioactive leaks continue to threaten residents near the Fukushima No. 1 Nuclear Power Station, with the restoration of cooling capacity to the ailing reactors perhaps months away.

Nobody had even dreamed of what has turned out to be a chain reaction of the earthquake, the tsunami and the nuclear plant accident. That was something that “could not have happened.” Before the disaster, most economists had confidently predicted that the nation’s economy would start growing in the first quarter of this year, after a negative growth shown in the preliminary statistics for October-December last year.

How will the “Eastern Japan Great Earthquake Disaster” impact on the Japanese economy and its gross domestic product? Anticipations are that the distribution systems will remain paralyzed for some time to come, that those who have been evacuated from the radiation-contaminated areas near the nuclear power plant are not likely to be allowed to return home anytime soon, and that the mood of “self-restraint” will prevail throughout the country, drastically reducing personal consumption in the foreseeable future. Moreover, the number of visitors from abroad will plummet sharply and tourist spots within the country will become deserted.

Residences damaged or destroyed by the quake and tsunami will be counted as “negative” personal housing investment; office buildings, manufacturing facilities, hotels, shopping centers and the nuclear power stations as “negative” capital investments in the private sector; and roads, public facilities and infrastructure as “negative” government spending.

Within days of the disaster, the value of the yen currency sharply rose to surpass ¥80 to the U.S. dollar as speculators rushed to buy the yen on an unverified assumption that many domestic business entities will sell their dollar holding and buy the home currency needed for reconstruction.

A high value of the yen will undoubtedly deal a serious blow to manufacturers who are highly dependent on export and result in reducing the net export, which is an important component of GDP. Furthermore, production of automobiles, electric machinery and other industrial goods has been hampered as supply of components from plants located in the stricken areas has hit a snag.

There has been a steep decline in the number of people enjoying themselves in the central parts of Tokyo and other major cities, perhaps out of their sympathy for those who are in distress or perhaps because of reduced electric power supply.

“Fallacy of composition” is a proverbial economic terminology meaning that while there is nothing wrong in an individual acting in a reasonable manner, an undesirable consequence could result if a large number of people act in the same manner in unison. It is no doubt reasonable for men of prudence to reduce their personal consumption out of sympathy toward the victims of the disasters in the Tohoku and northern Kanto regions. But if a large majority of those in major metropolitan districts exercise the same restraint all at once, the entire nation will plunge into a negative economic spiral. Stagnation will prevail further, tax revenues will fall drastically, and the government will be forced to issue more bonds to finance reconstruction.

It does not constitute “fallacy of composition” for individuals and corporations in the areas being supplied with power from Tokyo Electric Power Co. to save electricity in hopes of avoiding “planned rolling outages.” Power shortage has been triggered by the troubles at the Fukushima nuclear power station which accounts for 20 percent of the company’s total generating capacity.

All of the 10 nuclear reactors at the Fukushima No. 1 and No. 2 stations will in all likelihood remain idle for some time to come even after the radioactive leaks are controlled. The entire nation must take this opportunity to establish and perpetuate a new lifestyle and social system less dependent on electric power consumption. At the same time, the question of who will bear the cost of reconstruction in what manner must be deliberated on and debated in earnest.

Huge sums of investments will inevitably be poured into reconstruction of houses, buildings and public facilities, while personal consumption will rise as individuals start buying electric appliances and automobiles. It appears certain that in three to five years, the calamities brought about by the earthquake and tsunami will contribute to the nation’s economic growth, just as public works projects, even the wasteful ones, do.

The reconstruction projects have to be financed by tax revenues and deficit-covering government bonds. Falling GDP will lead to reduced revenues from the individual and corporate income taxes and the consumption tax.

Even if the consumption tax rate is raised under the name of “reconstruction tax,” the intended level of revenue may not be achieved if the households in Tokyo and other areas not directly affected by the earthquake and tsunami continue to tighten their purse strings.

According to one theory, the cost of reconstruction, not counting the repair of the damaged nuclear reactors, is estimated at ¥20 trillion. If this is to be covered by the consumption tax, the rate would have to be raised to 13 percent from the present 5 percent, based on the assumption that a raise by each percentage point represents an increased revenue of ¥2.5 trillion.

The government will be forced to bear at least some of the cost of compensating for damage caused by the nuclear plant accident because of its responsibility for promoting nuclear power generation as the core of the national energy policy.

The government is more responsible for the nuclear crisis than Tokyo Electric Power. In fact, the government has been providing cities, towns and villages in close proximity to nuclear plants with subsidies based on three laws related to electric power generation. Fukushima Prefecture alone has received ¥13 billion in such subsidies. This shows how closely the government and the utilities have worked to build nuclear power stations. That makes it all the more incumbent upon the government to bear a big share of the responsibility for what has happened.

There will be enormous cost exceeding anybody’s imagination in dealing with the nuclear plant disaster, dismantling damaged reactors, rebuilding power-generation capability, and compensating residents near the nuclear power plant for damages related to radiation exposure or the threat of it.

Takamitsu Sawa is president of Shiga University, Japan.