Don’t bet against Japan’s resilience

By Ross Schaap

The devastation in Japan, the enormous human suffering, and the rising anxiety over ongoing problems in the country’s nuclear facilities are well-documented. But assuming the nuclear crisis remains localized with no direct impact on economic activity in Tokyo, here are a few reasons for (cautious) confidence in Japan’s resilience.

In 1995, when an earthquake struck the important industrial city of Kobe, many observers forecast that the impact of the disaster on Japanese production would last for many years. Yet, economic activity in the affected area reached 98 percent of pre-quake levels within 18 months, and the cleanup was largely complete within two years. This is a reminder that the seismic magnitude of a quake is a less reliable indicator of long-term economic damage than the strength and resilience of the country in which it occurs.

Long-term damage to Japan’s economy is limited by the reality that the country’s industrial core lies outside the region most badly damaged by the earthquake, the tsunami, and the nuclear emergency.

Japan’s economy has excess manufacturing capacity on most fronts and, in time, will adjust.

As Robert Madsen and Richard J. Samuels have written, the disaster has temporarily secured Prime Minister Naoto Kan’s government. For the moment, no one within his Democratic Party of Japan (DPJ) is willing to risk a party split or is strong enough to launch a leadership challenge. Further, the Japanese public will have no tolerance for attempts to oust the DPJ government or for a national election in a time of such crisis.

As a result, Kan should now finally be able to pass budget-related legislation that will authorize the debt issuance needed to execute the government’s budget.

Reconstruction will spur industrial activity and long-term investment in housing, commercial and industrial infrastructure. That’s a source of long-term economic stimulus.

The magnitude of the government response will be driven by need, not by fear that markets will constrain it. Gross debt has surpassed the 200 percent of GDP threshold, but net government debt is at about 110 percent of GDP. That’s high, but it’s not above the level managed by other countries in the past. Government notes are mostly held domestically, and Japan has a healthy external balance, with a net international investment position of $2.8 trillion.

Japan, a country already treated in much of the international media as a fading economic power, now faces a crisis of enormous proportions. But it is a mistake to underestimate the country’s ability to meet the challenges it now faces.

Ross Schaap is director of comparative analytics at Eurasia Group and an analyst of Japanese politics.