Three Vital Issues

More than a month has passed since the March 11 disaster. Search and rescue operations are still continuing, and there is no end in sight to the crisis at the nuclear power station in Fukushima. Nevertheless, the time has come to start thinking about reconstruction. On April 14, Kan Naoto’s government started the ball rolling with the launch of the Reconstruction Design Council. Countless questions need to be answered—not least, the question of how to resolve the nuclear crisis—but for now I want to address three issues in particular.

The first issue that needs to be addressed is what shape rebuilding should take in the areas hardest hit by the disaster. Reports have suggested that the government is considering not rebuilding housing in coastal areas where there is the risk of further tsunamis in the future. However, many residents will naturally want to return to their former homes. It is therefore vital that the government obtain the consent and understanding of local governments before pressing ahead with any plans along these lines.

The second priority will be to consider the impact of the disaster on the Japanese economy as a whole. Many companies with production bases in eastern Japan suffered serious damage. This has disrupted the supply of vital components in many industries, and has had an impact on the production activity of companies throughout the country.

Two questions are particularly important in this context. First: What will the government do to help businesses recover? In particular, consideration needs to be given to encouraging companies to invest in rebuilding within Japan. Many companies suffered damage to their production bases in the Tōhoku region, and though the newspapers are full of reports of companies working to rebuild there, some companies may decide that it makes more sense to shift their production facilities overseas to places where wages are cheaper and taxes less burdensome. There needs to be a discussion within the government on what can be done in terms of taxation and other incentives to persuade these businesses to keep production in Japan.

Thinking Outside the Box on Electricity

Equally important is the question of how the government addresses the energy crisis that seems set to cause disruptions in the Tōhoku and Kantō regions for at least the foreseeable future. In areas served by the Tōhoku Electric Power Company and the Tokyo Electric Power Company (TEPCO), the Fukushima Daiichi (Number One) Nuclear Power Station was crippled by the tsunami and the Fukushima Daini (Number Two) station and Onagawa nuclear power stations have also been shut down since the disaster. We can expect serious power shortages in the Tōhoku and Kantō regions when demand peaks this summer.

So far, the government’s response has focused on asking companies and individuals to do what they can to save electricity. Is this really the best they can do? For companies, these efforts to save power can have a crippling effect on production. The government needs to consider more proactive ways of increasing the electricity supply rather than just exhorting people to use as little power as possible. In terms of restoring generating capacity, the government seems to take it for granted that it should continue to rely on Tōhoku Electric and TEPCO. This is not good enough. The government needs to think outside the box, and look for alternative ways to boost capacity. One possibility would be to consider breaking up the two companies’ distribution grids and encouraging other companies to get involved in electricity generation.

Spreading the Burden 

The third major question will be how to finance reconstruction. Initial estimates published by the Cabinet Secretariat put the damage done by the disaster in the range of ¥16 trillion to ¥25 trillion. And this does not include the compensation that will need to be paid for the nuclear accident in Fukushima, to which the government will have to make a contribution. Once this is factored in, the amount the government will need to come up with is vast indeed. Even before the disaster, Japan’s public finances were in a parlous state, with new bond issues outstripping tax revenues. It will be impossible to raise the money required for reconstruction and compensation simply by issuing new government bonds.

Even if the government does raise substantial amounts by issuing new bonds in the short term, therefore, it also needs to look at spending cuts and tax increases to secure the necessary funds. There needs to be a debate on the possibility of cutting pensions and other social security spending on a temporary basis. If there are tax hikes, the government should consider spreading the burden over the long term to minimize the impact on the macro economy as much as possible. If the government decides to increase the level of the consumption tax to fund reconstruction, for example, it should consider doing this in gradual steps over an extended period of time.

Another important question concerns the shape and form the government’s policymaking unit for reconstruction issues should take. I will address this question on a future occasion, along with several other important issues related to Japan’s efforts to rebuild.

(Originally written in Japanese on April 17.)