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Japan 2011: 'The Impact Will Be Global'

Expert outlines worldwide consequences from Japan's tragedy

A man cycles past upturned cars and other tsunami-wrought devastation in Natori City, Miyagi prefecture, on March 14, 2011. (Mike Clarke /AFP/Getty Images)

A man cycles past upturned cars and other tsunami-wrought devastation in Natori City, Miyagi prefecture, on March 14, 2011. (Mike Clarke /AFP/Getty Images)

Expert outlines worldwide consequences from Japan's tragedy

NEW YORK, March 15, 2011 - In the wake of Japan's tragic Great Tohuku Earthquake and Tsunami disaster, Asia Society Global Council Member Kenneth S. Courtis outlined some of the bigger economic questions posed by the catastrophe for AsiaSociety.org. Courtis is Consultant and Former Vice Chairman-Asia for Goldman Sachs (Japan), Ltd.

What might be the political and economic impacts [of the March 11 earthquake and tsunami] on Japan?

Of course, there are not just economic implications, as an event like this is also profoundly political in its implications. The Japanese government had been very weak going into this vast catastrophe. So, will the nation's rival political parties be able to overcome their deep differences? It was expected that a general election would be held soon. That is now seems less likely. Yet the government cannot pass new spending plans without the support of the opposition. Indeed, the government has not yet even managed to pass the regular, annual budget for FY2011, let alone a new, and major supplementary budget to finance the rebuilding of the vast devastation along the Tohoku coast.

At best, there will be a hiatus in political infighting. And, Japan has seldom produced the best in the last few decades. The current government has been trying to reduce public works and pubic investment as part of an initial effort to reverse the debilitating trend in public finances. If it were to keep to that objective, that would mean big cuts in other parts of the budget (for example, social entitlements)  in order to release funds for the rebuilding. But in such a precarious political situation, such cuts seem very unlikely.

So the result is very likely to be still substantially larger deficits for the next three to four years. This would surely drive total government debt to close to 250% of GDP by 2015. In this context, a more likely scenario is that vast pressure builds on the BOJ to sharply increase monetary expansion. That pressure will be further justified due to the "deflationary" impact of the crisis as for the next couple of quarters overall output will be lower.

What about Japan's energy needs?

About 5% of Japan's electricity generation capacity could be lost for good. They are filling some of these reactors with sea water (i.e., salt water), which means that they have basically given up on saving them as electricity production units. The salt will corrode them to such an extent that they cannot be of further use. The main object is to stop a meltdown from happening, at any cost. About a third of Japan's electricity comes from nuclear power. So far they have shut five reactors. These five produce about 20 percent of the country's nuclear energy.

So that means about six to seven percent of the national electricity supply is now offline. Two refineries have also been shut, and ports in some areas are disrupted, so that will also have an impact. So let's guesstimate that eight to nine percent of total electricity is now offline. And it is likely to be off line for some time. Additionally, about two to four percent of other energy—oil, gas, coal—is also offline. So in total about 10 percent of capacity is currently offline. There will also have to be safety checks at all of the nuclear plants and work done to increase their resistance to future quakes. That will also make it difficult to increase supply any time soon.

Of course, the economy will not require as much energy immediately, as activity will be down. For the next few days, everyone will be checking for damage—car assembly lines, chemical plants, electronics plants, et cetera. But as production comes back on stream, there will be constraints on production for a period until new electricity supply can be brought back on stream.

Next: "The impact will be global."