Some events remind us of our frailty. Such was the 11 March earthquake that shook Japan and provoked the tsunami that washed away towns and villages in the Tohoku region. The pictures reminded us of humanity’s insignificance in the face of large natural disasters, and with over 20,000 dead, of their appalling personal consequences,.
The events also recalled humanity’s capacity to inflict misfortune on itself. The tsunami severely damaged the cooling system at the Fukushima Daiichi nuclear power plant, setting off a cascade of nuclear accidents and the release of radiation into the environment. Fears of contamination prompted the departure of many foreigners from Tokyo; the government has announced that levels in the capital’s tap water are too high for infant consumption. Most of the capital’s 18 million residents, though, carry on gamely, subject also to disruptions from rolling electricity blackouts and panic buying of certain commodities.
The economic consequences may be significant. Early estimates of the cost of rebuilding are about 5% of Japan’s US$5.39 trillion GDP. Japan’s economy has not been healthy for years, and the earthquake may knock it back into recession. A new slowdown would harm economies such as Australia, which has about 19% of its exports marked for Japan, as well as Indonesia and the Philippines, with 16% each. Other economies should be fine: only 2% of the EU’s exports go to Japan, 5% of those from US, 6% from South Korea and 8% from China. The earthquake has also disrupted manufacturing, with delays in production of components affecting industry in China, Singapore, and Taiwan. Indeed, these disruptions highlight the artificiality of looking at national current account and trade figures in Asia; the region has become one interlinked production belt.
The earthquake will also have financial consequences. After the disaster Japan’s stock markets fell about 16%, although intervention by the Bank of Japan staved off collapse. The yen also rose to its highest level against the US dollar in 25 years, of JPY76.25, fuelled by speculation about the repatriation of funds to pay for reconstruction. Indeed, Japan remains the world’s largest creditor nation, despite its weak public finances; the private sector holds over USD3 trillion (or about 52% of GDP) in investment overseas. The recall of funds could curtail demand for foreign debt with higher rates of interest, such as that issued by Australia, Brazil and New Zealand. This does not seem to have happened yet, though, perhaps because the G7 central banks intervened to bring down the yen. The question now is whether the big central banks have capped the yen’s price, given their now limited holdings in yen; if so, foreign exchange traders may return to the carry trade – borrowing in a low yielding currency to invest in those offering higher returns, as before the financial crisis in 2007 and 2008. If not, then the consequences for some states, perhaps including the US, may be more expensive debt.
The currency intervention may also have unintended diplomatic consequences. China, notwithstanding its US$2.3 trillion in foreign exchange reserves, played no role. Furthermore, the G7 step contradicts Washington’s longstanding demands that Beijing move towards a more liberal currency regime. It may thus undermine US clout on the currency issue, further dissipating influence already drained by financial crisis and, as ever, preoccupation with war in the Middle East. Without a change of model for Chinese economic growth, though, both the pressures over Asia’s production surplus and the risks associated with never ending purchases of US Treasuries could provoke new crises.
Earthquakes in Japan have also often had political consequences. The Ansei earthquakes in the 1850s played a key role in transforming society in the aftermath of the 1852 visit by Commodore Perry’s “black ships”, leading Japan into civil war and the Meiji era modernisation. Then in 1923 the Kanto earthquake ended the moderation of the Taisho era, setting a new path towards authoritarianism, the 1937 invasion of China and war in the Pacific. The Kanto earthquake played a particular role by diverting capital away from Japanese industry, adding to the appeal of autarchy. Another political shift took place in 1995 following the Hanshin earthquake. In the 1970s and 1980s, Japan’s growth had appeared unstoppable, but that ended with a major stock market and property crash in 1992, and subsequent years of deflation. The destruction of Kobe seemed to dash Japan’s hopes of becoming a superpower, ushering in instead a politics unable to address Japan’s challenges in terms of ageing, decline and fiscal liabilities.
At a glance, Japan’s politics remains in the Hanshin era. Prime ministers have come and gone almost every six months, a trend unbroken even by the opposition Democratic Party of Japan (DPJ) taking office in 2009. The current government under Naoto Kan was close to collapse on the day of the earthquake, and still does not control both houses of parliament, resulting in a “Twisted Diet”. No signs of political cooperation are discernible; the opposition parties turned down a request to join a government of national unity. Yet hopes are rising that the earthquake may end this era of drift. Japan has already moved away from the cronyism of the Liberal Democratic Party (LDP) era. The current government’s failure to provide adequate aid to the stricken regions and the nuclear crisis are also prompting previously unasked questions about government effectiveness and lethargic public utilities. This trend should continue, leading to real changes in the political arena.
One indicator of change may be food. Agriculture is politically sacrosanct in Japan, whose farmers shelter behind high tariff walls. However, Tohoku is home to many food brands, and fears of radiation are growing at home and abroad. Prior to the earthquake Kan had signalled his intentions to bring Japan into the Trans-Pacific Partnership (TPP), a new body championed by small trading states such as New Zealand and Singapore which seeks to reduce both tariffs and non-tariff barriers. The political system may now have be aligned for membership. Any such move would transform the political economy of Japan and may reignite hope for trade liberalisation in the region.
Another area to watch will be energy policy, as Japanese people recoil from nuclear power. A reappraisal may see Japan buying increased quantities of gas from Russia, mining more coal in Hokkaido and of course expanding its reliance on renewable energy sources. In the shorter term, though, Japan will also need to import larger quantities of oil, much from the Middle East. Such changes would have many implications, not least for foreign policy, but it is not clear how. Japan’s shortage of resources prompted both the rampage across Asia in the 1940s as well as the reliance on nuclear energy and commerce of the post war years.
Of course, the future is murky, and at present, Japan’s stricken people must carry out the dreadful tasks of finding and burying their dead, clearing and rebuilding their towns, and coming to terms with what has happened. That task is truly tragic, and our hearts go out to them.