HONG KONG — Japan’s economy supremo, 72-year-old Kaoru Yosano, clad in his regulation ministerial “Action Man” powder-blue boiler suit and heavy gumboots ready to spring into emergency mode instantly, claimed last week that the damage to the country’s economy from the earthquake and tsunami would be “limited.” He mused to the Financial Times that there could be a loss of perhaps 0.1 to 0.2 percent of output. Thus overall growth would be positive and 1.5 percent in the 2011 fiscal year.

At the very least, Yosano was being economical with the economic truth. Indeed, it seemed a dangerously surreal comment when Japan is fighting to prevent a catastrophic nuclear meltdown. He failed to take account of the spreading damage of the aftereffects of the earthquake, tsunami and nuclear fallout, as well as the economic, social and political obstacles to putting the country on its feet again.

Even if you can forget the harrowing individual stories of life and death, the sight of half a million people shivering in temporary shelters, and another million households without power or running water, the triple disasters have shaken Japan to its core. In the relative safety of Tokyo, 373 km away from the epicenter, there are regular aftershocks making the population queasy, rolling power blackouts that have shut much of Japan’s manufacturing industry and reduced the normally regular as Swiss clockwork transport services by half. No wonder families nervous for their children’s health and worrying about radiation have begun to leave Tokyo.

Outer ripples of the triple devastation have extended beyond Japan’s shores, proving that no island, however insular, is really alone in today’s globalizing world. Japan’s stock market went on a roller coaster ride, with billions of dollars wiped off the value of shares as nervous foreigners withdrew from the market. The yen, perversely, rose to all-time highs since the World War II of ¥76 to the dollar, as Japanese brought back funds to help pay for the disasters, aided by speculators looking for a fast buck.

Only when the Group of Seven industrialized countries got their act together promising concerted currency intervention did the yen weaken to between ¥81 and ¥82, still too high for most Japanese exporters. The stock market gained 2.7 percent on Friday, though it was still heavily down on the week.

Because industrial production lines and supply chains are global, the effects of closures in Japanese factories are being felt as far away as U.S. auto plants. Apple, General Motors and Ericsson are among global brand-name companies worried about disruptions to their assembly lines if the smooth processing of parts and, especially, flash memory chips from Japanese factories is interrupted for more than a few weeks. Global production lines are finely calibrated with components for everything from cars to computers, mobile telephones and cameras supposed to move across the world just in time for the next stage, and Japan is responsible for 30 to 50 percent of critical items.

Yosano did his calculations by looking at the contribution of the most heavily affected areas to Japan’s GDP, just 4.1 percent, but he ignored the damage that spread to neighboring areas. The earthquake and tsunami destroyed or disrupted about 9.7 gigawatts (GW) of Japan’s nuclear generation capacity, about 20 percent of the country’s nuclear capacity. In addition, 12.5 GW of nonnuclear thermal capacity was knocked out, about 7 percent of Japan’s capacity in nonnuclear thermal, including crude oil, coal and liquid natural gas (LNG). Refining capacity of between 1 and 1.4 million barrels a day was also disrupted, which is between 26 and 32 percent of Japan’s total.

Continuing power cuts in Tokyo and the closure of auto and other factories throughout Japan testify to the fact the spreading economic damage. Toyota alone loses production of 10,000 cars each day its plants are shut. If it is a matter of a few days, losses can be made up, but if the power cuts continue and factories stay shut, the damage will be considerable.

If the closures last longer, or if power cuts means that factories cannot work full time, there will be threats to Japan’s manufacturing platform, employment and the economy. Japan has already experienced hollowing out of its industry with production moving to China and neighboring Asia, so it needs to get power and production resumed as a priority.

The most problematic issue as to how quickly Japan may get on its feet again is what may be termed “animal spirits,” the mood of the people at all levels. Unless and until the threat from the crippled Fukushima nuclear power complex is contained, the mood will be nervous.

Beyond Fukushima, there are reasons to be optimistic. The Japanese people have time and again shown their resilience and their imagination. The mountainous landscape of Japan has few natural resources apart from the people, who created a prosperous and thriving society that was the envy of the rest of the world several times before, most notably when it rose from the ashes of World War II.

Some economists claim that reconstruction never adds to growth, but Japan will be trying to create a new and upgraded economy learning from the problems of the past. The economy has plenty of slack and the stock market is trading at a 10-year, cyclically adjusted price-to-earnings ratio of 15.4, against an expensive 37.7 at the time of the Great Hanshin Earthquake. Indeed, Barron’s Weekly’s cover declared against a bright red rising sun, “Buy Japan Now.”

The costs of reconstruction could be in the $250-$300 billion range, up to three times the costs in 1995, and maybe 5 percent of Japan’s GDP. This would be manageable, if handled carefully, politically. Can the animal spirits of the politicians cope with the disaster and its consequences?

One must be sanguine. Prime Minister Naoto Kan and his colleagues’ pristinely laundered and pressed jump suits show no signs of sweat or dirt of the day. If the government wanted show solidarity, senior ministers could have visited the victims, as well as learning some of the facts on the ground.

Long before the disasters, Japan’s politicians were squabbling over a whole range of issues, with vicious infighting inside and between parties and with a kaleidoscope of ambitious but limited personalities clashing constantly.

Japan already has the highest government debts in the world, 220 percent of GDP, a budget heavily in deficit and is going through wholesale structural changes, including a rapidly aging population, 22 percent already over 65, rising to 40 percent in the next 20 years, which will add cripplingly to government health and welfare bills. Additional costs of rebuilding disaster areas will stretch the government imagination and its finances, and mishandled could be a tipping point for the cost of government borrowing.

Kan has suggested a grand coalition government to tackle the immense issues, but has found no takers. There are too many people who want him out. Until the politicians can get serious and understand the momentous issues facing Japan, there will be reasons to worry.

Kevin Rafferty, based in Hong Kong, is editor in chief of PlainWords Media.

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