Prepare for a Weaker Yen

The following is the text of a speech delivered in English by Utsumi Makoto on April 17 at the International Capital Markets and Emerging Markets Roundtable at an Institute of International Finance conference in Washington, DC.

First of all, I would like to express my deepest appreciation for the decision of the G7 Ministers and Governors for taking concerted action in the foreign exchange markets soon after the horrible disaster hit Japan. It was a great help from the international financial community for our country, facing such an ordeal.

Yes, it is an ordeal. It took away the lives of 30,000 people and property damage is tentatively estimated at 300 billion US dollars. That’s 5% of the nominal GDP of Japan.

The Challenge In Front of the Japanese Economy

In short term, the negative impact on the economy is serious.

First, all economic activities (agriculture, fishery, manufacturing, commerce) have stopped in the vast stricken area.

Second, the manufacturing sector at the national level is suffering from disruptions to the supply chain, because in this region there were many producers of parts and accessories supplying the automobile, electronics, and other industries. This supply chain interruption is affecting not only Japan but also Asia, the US, Europe, and Latin America. This is a relatively poor and not so densely industrialized area, but it is also deeply integrated in the global production chain.

Third is the nuclear power plant issue. The situation is still developing, overshadowing the economy and the society through various channels.

The contamination is spreading through air, soil, and water. It not only affects agriculture (this area produces 20% of Japan’s rice) and fisheries, but is also depressing the sentiment of consumers.

The power supply limit of Tokyo Electric Power Company has caused frequent planned blackouts. The power supply limit will continue to affect the metropolitan area, which is the center of the economic activities of the nation. The negative effects can be felt on production, commerce, transportation, leisure, and the daily life of people, and is aggravating the depressed sentiment of the people.

The nuclear clean up will take years. It is the deepest scar this unprecedented disaster has left behind, not only for Japan but also for the entire globe. As it is not a short-term issue, I would like to come back to it later.

As for the trade balance, it will deteriorate with increased import of rescue and reconstruction materials on the one hand, and the limit of the export capacity on the other. This trend will extend to the medium term. And together with the monetary policy of the BOJ, lagging behind the ECB and then the Fed toward the exit strategy, the yen will weaken over the next one to two years.

Money, Political Leadership, and Nuclear Power

As to the medium term, according to past natural disasters, the reconstruction process has meant significant stimulus for the economy, pushing up the GDP growth for two to four years. We should be able to follow the same pattern again, boosting the economy in the medium term. However, this time we have three challenges, which we did not encounter in the past cases.

First, the money. In the case of the Isewan Typhoon hitting the Nagoya region (1959) and that of the earthquake in the Kobe-Osaka region (1995), the areas hit were mainly industrial and commercial. The private sector could play a major role in reconstruction activities. But this time, the stricken area is poor, mainly supported by agriculture and fishery. Accordingly, in the reconstruction process, the public sector will have to take the principal role.

In Japan, the private sector has money, but the government has accumulated debt. Public debt as a percentage of GDP is almost 200%. How can the government find the funding for the reconstruction while avoiding a further overhang of the national debt?

Second, the political leadership is in question.

Probably, there is only one key to overcome these two challenges. What would happen if Prime Minister Kan Naoto and his party, instead of sticking to the populist budget items in their Manifesto, declared at the recent general election, prepare to discuss open-mindedly with the LDP (the largest opposition party) to find a way of funding the reconstruction program? It might pave the way for a grand coalition, even temporary or partial, to scrap expenditures with lower priority and to agree on introducing solidarity taxes. If it works, it will become, as our saying goes, a way to "turn a misfortune into a blessing" for Japanese politics.

Third, the aftermath of the Fukushima power plant. Japan is the only country exposed to radiation from an atomic bombing. Japanese people tend to be allergic to nuclear energy. To find locations for new nuclear power plants will be almost impossible in the future. How can we find alternative energy sources? For the moment, I have no answer. But this is not only Japan’s problem. The world has become so interconnected, a crisis quickly becomes global. Already we are seeing rejection of nuclear power spreading all over the world. But the world needs more energy and fewer greenhouse gases. Fukushima overshadows the energy policies of the world.

Learning from the Crisis

Let me close my remarks by expressing my deepest gratitude for the sympathy, the assistance in rescue activities, and the warm encouragement from all over the world, which we will never forget.

I also would like to emphasize that during this unprecedented disaster, we confirmed that the spirit of helping each other and the sense of solidarity still firmly exist in our society.

To be able to confirm this solidarity, both national and global, is the most important asset we have got to take us through this crisis.