Effects of the Tohoku disaster and options for Japan's response

More than three weeks after Tohoku and the eastern parts of the Kanto region were hit by a massive earthquake that triggered a tsunami and a nuclear power plant crisis — there are few indications of when Japan might get the situation under control.

Why is the disaster having such a major impact on the economy and what can be done to deal with it?

First of all, the March 11 quake affected a much wider area than the 1995 Great Hanshin Earthquake, and traffic disruptions are severely hindering the flow of goods.

Information is also at a premium. Even in the age of the Internet, the disaster had at one point cut off communications between Tokyo and some local governments as well as among municipalities.

This is ironic, given that the Internet was originally developed by the U.S. military as a way of preserving communications in times of war or other emergencies.

In devastated Rikuzentakata, Iwate Prefecture, family registration records were another casualty of the tsunami. The local governments should reorganize their administrative units so each covers a wider area. They should also introduce a system that allows residents’ records to be shared among municipalities as a backup.

Financial institutions know the value of information. They have installed dual computer systems in the Kanto and Kansai areas in case one is needed as a backup. Such measures of course mean higher costs, but measures like these should be considered insurance for emergencies.

The “kanban” just-in-time production method, which keeps parts inventories at a minimum and has become the symbol of Japanese manufacturing efficiency — may need to be reviewed as well.

The second thing Japan needs to look at is its crisis management system.

The radiation leak from the Fukushima power plant has all the makings of a man-made disaster, and the series of events that followed the quake has shed light on the weak emergency management capabilities of the government and private-sector firms.

And the disappearance of food from supermarket shelves reflects a lack of disaster preparedness on the part of each household.

When I was living in Switzerland during a business assignment, I learned that not only the government, but also each family had stores of water, wheat or other foods in their basements for emergencies.

It was then that I realized the country had incurred a cost for maintaining its policy of permanent neutrality.

May the recent food and water shortages here serve as a warning to our island nation, which appears to have taken peace for granted since the end of the war.

One big reason the catastrophe has attracted so much attention worldwide is that, in addition to the magnitude of the earthquake and tsunami damage, many people overseas consider the nuclear power plant crisis as something that could happen in their own countries.

The Group of Seven countries was so concerned it agreed to conduct concerted market intervention — the first time in more than a decade — to stem a sudden rise in the yen as the crisis grew. But that was also because they were worried about how it might affect their own economies.

The crisis has exposed a huge perception gap between Japan and many other countries on radiation risk. It will help restore overseas trust if Tokyo discloses relevant information on how the crisis differs from Chernobyl, real-time data on the radiation leak, and how emergency teams from other countries are contributing to the effort to bring the crisis under control.

But what will be the impact on the Japanese economy?

In the short term, the situation will push up prices.

Even before the earthquake, international commodity prices were rising and crude oil had already passed $100 per barrel. Add to that the damage caused to manufacturing facilities, production and transportation.

These will naturally increase costs and reduce oversupply, thereby pushing up prices.

However, the phenomenon will come to an end once transport and distribution systems return to normal.

Raw materials once reserved for exports can be diverted to domestic production, and unlike the days when Japan lacked foreign currencies early in the postwar years, we can make up for shortages here with imports.

Two points should be noted here.

One is that substitution of domestic supplies with imports can trigger structural reforms in several industries. Some light industries in areas hit by the Great Hanshin Earthquake, such as rubber footwear production in Kobe, for example, were replaced by imports, which ultimately changed the structure of local industry.

More important is that cuts to employment and net income are a certainty.

Suspension of factory production leads to job losses, while reduced business hours at companies and retailers means less overtime pay for workers.

This, combined with the uncertainty over the future of the economy, means household spending will naturally fall.

For the time being, economic recovery will depend a lot on how quickly the nuclear power plant crisis can be resolved.

At the same time, the very challenges facing Japan, including those in agriculture and energy, can be viewed as opportunities to accelerate reforms of the nation’s industrial structures.

Teruhiko Mano is an international economic analyst.