Grasping the Nettle on Public Finances

Economist Nariai Osamu considers the fiscal policies Japan that needs to introduce to address the impact of the earthquake on the Japanese economy.

Economist Nariai Osamu considers the fiscal policies Japan that needs to introduce to address the impact of the earthquake on the Japanese economy.

Immediately after the Quake, in Singapore

Four days after the earthquake, I left Japan for Singapore, Malaysia, and Myanmar, aftershocks continuing to shake Haneda Airport as I waited for my plane. The purpose of my trip was to give a series of lectures at universities and research institutions in the region to discuss what kind of impact the earthquake, tsunami, and nuclear power station accident were likely to have on the Japanese and Asian economies.

While I was away, the stock market slumped and the yen shot to its highest level ever against the dollar. Statements made by the government only made people even more apprehensive. In particular, the reaction and press conferences given by the government and representatives of the Tokyo Electric Power Company (TEPCO) in response to the crisis at the Fukushima Daiichi Nuclear Power Station only served to cripple the competitiveness of the Japanese nuclear power industry and make the government’s lack of leadership clear for all to see. When Prime Minister Kan Naoto called for people to “endure” the disaster, he gave the impression that he was looking down on the qualities and character of the Japanese people. People directly affected by the disaster have been far more impressive than the national leadership in terms of the discipline, restraint, and endurance they have shown.

In a crisis situation like this, the nation’s leaders need to demonstrate a national vision for rebuilding and recovery, provide evidence that this vision has the strong support it needs from both inside and outside Japan, and then chart a clear course for national reconstruction. After the oil shock crisis in 1973, then Prime Minister Fukuda Takeo led from the front, showing businesses and the Japanese people in general a clear path forward by announcing a series of measures to bring about a “full cure in three years.” In contrast, the people in charge today fully deserve the reputation they have earned internationally as “Japan’s weak government.”

On the other hand, even the government minister who recently described the Self-Defense Forces as an “instrument of violence” must surely have been moved by the selfless spirit of sacrifice that so many members of the forces have shown by risking their lives in relief efforts since the disaster took place. The moving press conferences given by the Self-Defense Forces and firefighters have won them widespread support.

The True Cost of the Disaster: ¥50 Trillion Over Five Years

Damage assessments published so far by Japanese research institutions and the World Bank have vastly underestimated the extent of the damage the earthquake and tsunami will ultimately cause. The following three factors are crucial.

  1. Together, the six prefectures of the Tōhoku region have a combined GDP of around ¥50 trillion, equivalent to 12% of Japan’s national GDP. Not all of this has been lost, of course, but concentrating exclusively on flow has led many people to mistaken conclusions. Factors of production such as human capital, capital equipment, and infrastructure have been lost. These losses will cause major disruptions to production for at least the next five years. The World Bank’s estimate that the disaster will cause a loss of ¥20 trillion in GDP is too low. Instead, we should be prepared for the direct costs in the affected areas to be in the region of around ¥50 trillion over the next five years.
  2. Japan relies on nuclear power for around a third of its electricity needs. Of this, approximately 20% was provided by the Daiichi (no. 1) and Daini (no. 2) nuclear power stations in Fukushima. It is estimated that the recent catastrophe has wiped out about 6% of Japan’s total electricity supply capacity. The baneful effect this has had on economic activity is symbolized by the so-called rolling blackouts that have been implemented periodically in noncentral parts of Tokyo and surrounding prefectures. But even here, TEPCO and the government have made a bad situation worse by scheduling power cuts and then cancelling them at short notice once people have already made arrangements and changed their schedules. Like the boy who cried wolf, TEPCO and the government risk damaging their credibility irrevocably if this continues. There is even a feeling that the authorities are deliberately taking advantage of the Japanese tendency to pull together and make shared sacrifices when times are tough.
  3. Economically, the Tōhoku region is extremely important, even more tightly integrated than other parts of Japan into the wider Asian supply chain. It was this fact that forced Apple to postpone release of the latest model of its iPad device. In terms of industrial production, the region accounts for 13% of the national total by shipped value for electronics components and 15% for information and communications parts. As well as Tōhoku University, the region is home to several companies with an international reputation in the field of semiconductors. The disaster has dealt a major blow to the region’s capacity to produce these components. This will not only bring down overall Japanese productive capacity but will also have a major impact on the global electronics industry.

Raise Consumption Tax to 10%

It is safe to assume that the government will need to raise around ¥40 trillion in public funds for reconstruction purposes over the next three to five years. Given the fall in tax revenue that will result from minus growth in 2011, if the government tries to raise these funds by issuing new national bonds, total government debt will exceed 250% of national GDP. This has led to concern about an increase in long-term interest rates, leading to a slump in the stock market and a galloping yen. This is only to be expected.

The message being sent out by the government makes no sense—either to the Japanese themselves or to people overseas. In a moment of national crisis, it is not the place of the government to be demanding “perseverance” from the people they are supposed to be leading. The nation’s politicians need to demonstrate principle and commitment by forming a limited-term coalition government to work urgently on the task of national reconstruction. One step the coalition will need to take is to increase the consumption tax to 10%, from 5% at present. The disaster areas themselves would naturally be exempt. An increase of the consumption tax on this scale would levy more than ¥50 trillion over the next five years. Starting from the fifth year, this revenue could be converted into a special-purpose social security tax. This is the only way. I sincerely hope the people in charge of national policy will give this idea the consideration it deserves. (Written on March 23, 2011.)

In This Series
An Economist’s View of the Disaster
A Fatal Lack of Urgency (July 26)
Japan’s Government of Fools: Enough is Enough (May 29)
Have the Current Generation Foot the Reconstruction Bill (May 8)
Japan Needs to Be on a “Wartime” Footing (April 22)
Four Priorities for Reconstruction (April 5)
Grasping the Nettle on Public Finance (March 23)

Nariai Osamu

Nariai Osamu

Graduated from the University of Tokyo, where he majored in economics. Served in various posts at the former Economic Planning Agency and as a senior economist at the Institute for International Policy Studies. Is now a professor at Reitaku University. Also active as an independent economist. His works include Exploring the Japanese Economy.