Japan Tsunami Costs, Lessons for US and EU‏

Tsunami Only Start of Japan’s New Problems
Credit: enciclopediapt

14 March 2011. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

Tsunami Only Start of Japan’s New Problems
Credit: enciclopediapt

14 March 2011. By David Caploe PhD, Chief Political Economist, EconomyWatch.com

You have to feel sorry for Prime Minister Naoto Kan of the Japan Democratic Party.

After a long and very up-and-down career as a — mostly — opposition politician, he finally ascended to the top spot in June 2010,

and since then has faced a series of daunting challenges that would be tough for anyone to confront.

From a structural point of view, he and his party inherited the absolute mess of the Japanese economy,

which has been basically stagnant since the collapse of the Tokyo real estate market in 1989,

due largely to the unwillingness of the long-dominant Liberal Democratic Party

to force the country’s Too-Big-To-Fail banks to put their losses openly on their books.

The result has been the so-called “zombie banks” — technically alive, but effectively bankrupt —

whose combination of financial weakness and political strength has been

a dead weight on Japan’s real economy for more than two decades now,

resulting in massive budget deficits and accumulated debt

that has severely limited any government’s ability to improve things.

Hmmm, sound like any other advanced country with which you might be familiar ???

When Kan tried to deal with the problem of insufficient government revenues by doubling the sales tax,

he sparked popular resistance in the country, and then a revolt in his own party,

that left him barely in control of both the DPJ and its weak coalition government.

Shortly thereafter, in August, he had the courage to apologize to Korea on the 100th anniversary of the Japan Korea Annexation Treaty,

a move that was historically necessary, but aroused predictable rancor from the powerful Japanese right-wing.

Then in September, he had to deal with the unexpected and aggressive demands of China re a small island chain in the East China Sea,

as part of which, the Chinese shut down for a time their exports to Japan of high-tech-vital “rare earth metals”,

on which several key Japanese, as well as other, companies are highly dependent.

Then in late November / December, Japan was shaken by the seemingly unprovoked North Korean attacks on South Korea,

a situation that always carries with it the potential of nuclear danger for Japan.

And now this, the Sendai / Fukushima earthquake / tsunami / nuclear emergency.

In such a fast-moving / still-evolving situation, it’s impossible to predict either the main events or their likely outcomes.

But it does seem fair to say — especially as reports mount of developing problems at a number of nuclear plants —

that this constitutes the most complex and multi-dimensional crisis in post-World War II Japanese history.

In this grave and unprecedented historical context, two salient facts stand out:

Japan was probably more prepared than any other country in the world

for a cascading series of inter-locking natural and man-made disasters like this.

Yet when confronted with the force of nature, there was little even a well-prepared society like Japan could do

to avoid not just thousands of casualties and serious damage to major elements of the infrastructure,

as well as the still-existent potential of several major nuclear-related meltdowns.

Even if that latter, apocalyptic, outcome can be avoided,

there is little doubt the already stagnant Japanese economy is going to be rocked by these events.

To be sure, once things finally settle down a bit — a situation by no means visible at the moment,

in the short run, there will certainly be a slight economic boost from re-construction projects.

But Japan has been doing infrastructure projects ever since 1989 —

as a way to avoid having to deal with THEIR Too-Big-To-Fail finance sector situation —

and it hasn’t had great overall economic results to date,

so there’s little reason to put much hope in whatever short-term stimulus MAY occur in that arena.

And, perversely, the need to pull yen back into Japan —

for both short-term emergency needs, and medium- to long-term reconstruction —

is, almost certainly, going to lead to a RISE in the value of Japan’s currency, the yen.

This is because the urgent need for funds at home is going to require liquidation of overseas holdings,

whether in yen or dollars or some other currency.

This increased domestic demand for yen will, not surprisingly, lead to its appreciation, or increasing in value.

And while there are certain advantages for any country in having a “strong” currency v-a-v other ones,

the blessings are less certain for a country like Japan — or China or South Korea —

whose economic growth depends on EXPORTS.

A stronger currency means its products will cost MORE overseas,

and that is about the last thing in the world the Japanese economy needs now:

MORE expensive exports.

So whatever else we can or cannot yet say,

it seems almost impossible to doubt the terrible events of the last few days, and those perhaps to come,

are most likely to WORSEN the chronic economic problems Japan has faced since 1989.

In that, unfortunately, lie some important lessons for the other stagnating advanced economies, namely the US and EU.

Like Japan, they have foolishly allowed the stock-price related needs of TBTF banks

to dominate considerations of both societal fairness

AND effective economic demand dispersed throughout society,

which is the ONLY way to insure long-run economic activity and sustainable growth.

As a result, they have moronically allowed themselves

to get into exactly the “lost decades” dynamic Japan has experienced since 1989,

and there are few signs they are going to get anything other than the miserable economic results

that Japan has had for the last 20 years even BEFORE this catastrophe.

This would be bad enough.

But even worse in this context is that both the US and EU have failed to take the remedial steps

for disaster preparedness that Japan did in the aftermath of the 1995 Kobe quake.

So while Japan was at least strengthening its structural soundness in the physical / construction / engineering dimensions —

while, admittedly, failing to do anything similar in the political / economic / financial areas —

the US and EU have made the same mistakes as Japan in the latter areas

WITHOUT having done much, if anything, to build up their ability to deal with — all too predictable — similar natural disasters.

Anyone who doubts this might consider the notable failure in both the US and Europe

to deal in any way adequately with the transportation problems — air / rail / road —

this not-quite-yet-over winter has already made painfully evident.

So, just as it was in the financial / real economic sphere,

the catastrophic events in Japan SHOULD be a wake-up call for the US and EU to start preparing for the worst,

since there’s little doubt something like this will, in the not too distant future, occur in both places as well.

Unfortunately, given their abject refusal to learn the lessons of Japan’s post-1989 coddling of the TBTF finance / insurance etc sectors,

it seems the current crisis in Japan is equally likely to encounter both deaf ears and blind eyes in the US and EU.

No one can say they haven’t been fully warned.

So when the crap hits the fan there, they will only have themselves —

and the self-willed obstinacy of both elites and peoples

to ignore the evident signs of approaching disaster —

to blame.

If you think what’s going on now in Japan —

a society that, whatever its problems at the top,

is exceedingly orderly and non-violent as a whole, at least internally —

is bad,

just wait until there are similar disasters in America and Europe.

They will make the heart-rending and frightening scenes being played out in Japan today

look mild / restrained / and “in control” by comparison.

And THAT is a very disturbing thought to consider.

David Caploe PhD

EconomyWatch.com