The Fukushima Implication

Eugene Mark

Shibuya, a prominent shopping district in Tokyo, Japan.

Shibuya, a prominent shopping district in Tokyo, Japan.

At the recent International Institute of Strategic Studies Asia (IISS-Asia) Seminar Series held on 14 June 2011, Professor Heizo Takenaka of Keio University gave an address on Japan’s March 11 disaster and its implications.

He focused heavily on the economic ramifications of the disaster, future policy direction, and learning points. A key concern of Takenaka’s which arose consistently in his speech revolved around the political leadership in Japan. He spoke of the fact a strong Japanese premier who could lead the country out of the current mess was desperately needed. Sitting in the same room, one could get the impression that he missed the Koizumi leadership, one in which he served.

Description of Impact

First, it would be useful to give a description of economic impacts caused by the March 11 disaster. According to Takenaka, there are two types of impacts – direct and indirect. The direct impact lies in the worsening fiscal position of Japan. The March 11 disaster created a problem for Japan’s fiscal position. At a time when gross public debt is approaching 200% of GDP, it would not be wise to adopt an expansionary fiscal stance. However, reconstruction efforts would require the government to establish a reconstruction fund, which would most definitely involve an extra budget.Although Japan is not flirting with sovereign debt default like some eurozone countries are, this is clearly a bad time for fiscal policy to be expansionary.

On the other hand, the indirect damage lies in the need for Tokyo Electric Power Co. (TEPCO) to provide compensation payments after its Fukushima No. 1 nuclear reactor had an accident causing radiation contamination problems.  While TEPCO has to grapple with declining profits, it would also have to compensate locals after the nuclear accident. Thus, there is an issue of financing compensation payments.

The questions asked by Takenaka were – to what extent should the Japanese government help, and how should these expenditures be financed. On the same day as when the seminar was conducted, the Japanese Cabinet approved a compensation bill, which would create an entity to help provide financial assistance. This new entity would be allocated government-backed bonds that could be cashed when necessary, and could receive loans from financial institutions, so as to facilitate financing for TEPCO. The compensation bill would still have to be passed by the Diet and hence, finer details would be clearer within the next few months. On a whole, it is generally expected that the Japanese government would have to increase public expenditure in rebuilding the country.

Economic Policy Outlook

The clear solution to increasing public expenditure would be tax hikes, which are looking highly probable at this moment. It is known that consumer sentiment in Japan suffered from the aftermath effects of the March 11 disaster.  Tax hikes would hurt consumer sentiment even further. Politically, the Japanese government is creating a feel-good factor by claiming that economic activities in the country are recovering, thereby adding justification for future tax hikes. For one, the Bank of Japan (BOJ) Governor Masaaki Shirakawa claimed that there was an upsurge in recent economic activities. The restoration of supply chain and a recovery in production have been achieved earlier than expected. Japanese industrial production rose to 1.6% month-on-month in April. Although economic activities are recovering faster than expected, Takenaka constantly reiterated that this recovery should not be a justification to raise taxes, at least in terms of consumption tax.

This is a problem that should not be ignored. This is where Takenaka could not hide his support for the reforms conducted under the Koizumi government. Essentially, at that time, Koizumi attempted to privatise the postal savings system. Privatisation would ensure a more efficient allocation of household savings. Interestingly, Takenaka was appointed as a Postal Reform Minister in 2004 for the privatization of Japan Post.

During the address, Takenaka believed that this could be the time when Japan should bite the bullet and return back to reforms. He remained confident that if the Japanese government returned back to the privatization of the postal savings system, there would be an even greater incentive for the government to eliminate wasteful projects. In the long run, that would reduce the need for a prolonged tax hike. Reconstruction and reform should happen simultaneously for a stronger rebound. Even so, for reconstruction efforts, one could not think of a better financing alternative to the tax hike, despite Takenaka’s strong aversion.

Power Shortages

Takenaka also answered questions from the floor on the issue of power shortages. As a result of power shortages, production capacity has been clearly affected -  37 out of Japan’s 54 nuclear reactors remain in shutdown. As a result of the nuclear hiatus, scheduled black-outs have been issued to conserve energy. Without power and electricity, industrial production would be hurt. If the nuclear reactors resume operation, there would be public outcry.

The Japanese public had two widely-known bad episodes with nuclear power. One incident happened around 65 years ago, when two nuclear bombs struck Hiroshima and Nagasaki, and another occurred in the recent March 11 disaster. Hence, there is strong public resistance to nuclear energy in Japan. Once a particular mindset is established, it is very hard for the Japanese to accept that their future lies in nuclear energy, whether they like it or not.

Power generation could be solved without nuclear power or so they believed. Like the Japanese Prime Minister Naoto Kan, Takenaka was convinced that the generation and distribution of power should be split. These are tasks now monopolised by Japan’s 10 power companies. With the split, there would be stronger competition and providers of new alternative energy would find it easier to enter the market.

Again, Takenaka advocated much needed reforms in the country. In this aspect, he hoped that Japan would use this opportunity to develop new alternative energy. With all due respect, I do not support his view. It should be reminded that new alternative energy or renewable energy has not been proven as a sustainable source of energy. Until it is proven, we should focus on “what we have” instead of “what we should have”. The crucial problem now is to start generating supply of energy to keep production recovery going.

It is highly predictable that anti-nuclear lobbyists would clamour to claim this recent nuclear accident as their own, to reaffirm whatever fear-laden view they had. Some media platforms also seem determined to convey the worst-case scenario to the Japanese public. These created a culture of pessimism based on apocalyptic frameworks. At the same time, we must also know that fears of nuclear power should not distract us from the crucial tasks at hand. At present, these tasks are first, the continued generation of production and economic recovery; and second, reconstruction efforts in affected areas like Iwate and Miyagi.

It should be highlighted that a lot of truck drivers, who were tasked with the job of transporting supplies within Japan, did not want to go past/through the affected areas for fears of radiation. There was a lot of frustration on the part of those affected by the disaster that their situation was being overshadowed by the nuclear disaster. In view of these quandaries, it is my opinion that Japan does need a strong political leadership, but for slightly different reasons to Takenaka. The political leader should reassure the public, instead of playing up their fears.