Bell Curve The Law Talking Guy Raised by Republicans U.S. West
Well, he's kind of had it in for me ever since I accidentally ran over his dog. Actually, replace "accidentally" with "repeatedly," and replace "dog" with "son."

Wednesday, March 16, 2011

The Politics of Japan's Recovery

Hi Everyone,

The deadly earthquake and tsunami in Japan are rightly dominating the news broadcasts these days. It’s even largely knocked the civil war in Libya and the increasing instability in places like Bahrain off the top of the news agenda. Most of the coverage is focusing on the immediate tragedy of the devastation and the following nuclear crisis. It’s reasonable that this should be focus of the 24 hour news crowd. But every now and again, they will bring up the economic consequences of this disaster – usually with a “what will this mean for the US economy” emphasis. What’s not being discussed is the politics of Japan’s response to the tsunami both in the short term and in the medium term.

Japan entered into this crisis already in a deep and ongoing recession. Japan’s economy has been struggling with deflation for more than a decade. Deflation is inflations nastier cousin. While inflation may be the “thief that robs in the night” by making everyone’s assets worth less, inflation at least benefits debtors. Deflation benefits no one. When the economy shrinks there is simply no way out of the reality that fewer assets are left to be divided up. Japan’s economy has been shrinking for a long time and the massive devastation to the North Eastern portion of the country will not help at all.

Adding to this economic misery, Japanese public debt as a percentage of their GDP as of 2010 was over 225%. That makes them #2 in the world in debt to GDP ratio. To put this in perspective, Greek and Irish public debt as a percentage of GDP are 144% and 94% of GDP respectively (as of 2010, the USA is at 58%). Japan may find it difficult to borrow the money to finance the rebuilding of a large part of their country.

Japanese politics is currently dominated by two major parties. The party that governed Japan for most of the post WWII period is the Liberal Democratic Party (LDP). The LDP set up a managed a protectionist, corporatist state that has been struggling for a long time. LDP officials dominated the politics of the country both legislatively and administratively. For decades, the civil service was hired, fired and promoted at the whim of the senior leadership of the LDP. They had cozy relations with big business and used their dominance of the courts and regulators to protect their corporate allies. There have been allusions to a scandal some time ago involving falsified inspection reports for the nuclear power plant currently in crisis in Fukushima.

The party in government at the moment is the Democratic Party of Japan (DPJ). This is a reformist, centrist party that grew out of the merger of a number of center-left parties and break away factions from the LPD in 1998. They finally won a majority in the Japanese lower house in 2009.

To manage the crisis, the government will have to establish the trust of the people and authority over private interests that may seek to take advantage of the crisis or escape responsibility for mismanagement (for example TEPCO's and their nuclear power plant). The long history of cozy and often corrupt relations between Japanese civil servants and corporate big shots may hinder this on two fronts. First, the Japanese civil service may still, after just two years, reflect the influence of 6 decades of LDP dominance. Many of these government bureaucrats may have more affinity with the executives at TEPCO than they do with their own elected superiors. I've heard comments from American media that various ministries in Tokyo are starting to give the press the run around - for example the science ministry refusing to discuss the Fukushima situation and referring all questions to the Prime Minister's office. This may be what the PM wants but it may also be unwillingness by the government officials with the most knowledge and responsibility to be forthright about what TEPCO is doing. Second, as the government appears to only release information once the story has already broken, it will lose the trust of the population and may not survive the next election.

To rebuild, Japan will have to either generate economic growth or borrow to finance government recovery projects. Japan is not in the best position to do either. We may be witnessing the event that marks the final transfer of regional leadership from Japan to China and South Korea.


Intrinsic Value said...

BOJ has expanded the QE program to 10T Yen to aid the recovery. However it needs to be signficantly bigger to have a meaningful impact.

Intrinsic Value

Raised By Republicans said...

Intrinsic Value,

Thanks for the details. The numbers we are talking about to have a meaningful impact are so huge that the Japanese government will have to borrow to provide them. Japan's economy has been shrinking for a long time so "growing their way out" of the crisis is not going to be an option.

USwest said...

Not sure how this fits into the Japanese situation because I am not a Japan specialist. But I am thinking of the recovery in New Orleans. The city is emerging as model for re-development, despite the recent oil spill. It was also a pretty corrupt place.

Sometimes destruction actually helps clean up the place.

Raised By Republicans said...

US West, I think there are lessons from New Orleans. Certainly it appears that rebuilding is possible. And corruption need not be a total impediment to that rebuilding.

Even in New Orleans the "recovery" was more of a transition to a new state of development. Much of the older, poorer (blacker) neighborhoods have simply not come back. The result is a smaller, wealthier and whiter New Orleans. I'm not sure how the racial dimension in New Orleans would translate to the relatively homogeneous society in Japan. But I think New Orleans shows that even "recovery" won't get back all that was lost.

And that said New Orleans had some huge advantages. New Orleans was a tiny fraction of the US economy as a whole which is far far larger than the Japanese economy. The US economy is also much healthier (even after 2008) than the Japanese economy. So New Orleans could expect private investment to come in from outside. They could also count on the rest of the country to act as a sponge to absorb some of the displaced people and economic activities. Houston, Atlanta and Baton Rogue were able to take in many displaced people and give them a new home both in the short run and even the long run.

New Orleans also has the advantage of being a major center for the exploitation of a valuable natural resource (oil). The Tohoku region of Japan is more like a tsunami prone version of the American Great Lakes region with a combination of manufacturing and agriculture.

New Orleans also could count on massive federal assistance that was large in comparison to the local economy but not in comparison to the overall national, federal budget. That is, the US government could inject enough money to make a huge difference without busting the bank.

Sendai is about the same size as New Orleans (pop is about 1 million). The population of the Tohoku region at large (the NE end of the Island of Honshu where the quake and tsunami had their most devastating effects) is about 10 million (much higher than the population of Louisiana and Mississippi combined). Louisiana and Mississippi combined are about 2% of the total US population. Tohoku represents nearly 8% of Japan's population. On top of that, the devastation to that 8% appears greater and more widespread than the devastation caused to the aforementioned 2% by Katrina.

The scale of destruction in Japan relative to the size and health of the Japanese economy will force a bigger commitment, again relative to the size of the Japanese economy, from a Japanese government already weighed down by debt and with a long tradition of cronyism and lack of transparency. I'd say this could get ugly but I doubt we'll see much of what goes on behind the curtain. My gut expectation is that the next decade for Japan will simply be one of relatively quiet but steepening decline.

Raised By Republicans said...

In related news, the US, UK, Canada and European Central Bank (the Euro guys), just announced that they will intervene to prop up the Japanese currency. To me this is a signal that the authorities who manage the world economy are worried enough about Japan's finances that international support is required.

This is what I was trying to hint at with part of my post. Japan is the 3rd largest economy in the world (for now) but they are hardly in a good position to handle this disaster (if any country really could be).