[Viewpoint] Japan after 3/11

The devastating earthquake, tsunami and nuclear crisis that struck Japan on March 11 seem certain to change that country forever. But how? It is often difficult to predict the longer-term strategic outcomes of crises when they are still ongoing - and this crisis is not yet over, particularly on the nuclear front. However, it is possible to begin anticipating the parameters of possible change.

Tragically, the scope of the human toll is becoming most obvious, with more than 20,000 souls lost, making this the greatest humanitarian disaster for Japan since World War II.

Damage estimates on the economic side are also coming in from around the world, with the World Bank predicting more than $200 billion in damages. (The Japanese government has not put out official estimates of the damage). By comparison, the damage from the 1995 Kobe earthquake also topped $100 billion and Kobe was a much more important manufacturing and port center than the Tohoku region struck this time. (Sendai’s port, for example, only accounts for 1 percent of Japanese shipping).

With the Kobe earthquake, there was almost negligible downward impact on Japan’s economic growth on a year-to-year basis, although the GDP took a short-term hit on a month-by-month basis. If the damage was only from the earthquake and tsunami, it is also possible that the downward impact on Japan’s GDP growth would be limited to one quarter of growth or so, though there would be severe worldwide short-term shortages of critical manufactured items such as silicon wafers for semiconductors.

However, the nuclear crisis adds a broader uncertainty that was not a factor following the Kobe earthquake. For one thing, Japan relies on nuclear energy for about 30 percent of its energy production and Tokyo Electric Power Company relies on nuclear energy for 50 percent of its output.

Japan’s western regions cannot transfer energy to the east to make up the shortfall. And even though Japan’s LNG (liquefied natural gas) plants run at 50 percent capacity and can be ramped-up, these plants need more frequent maintenance and will only offer a partial solution to the destruction of the Fukushima Daiichi power plant and the shut down (perhaps temporary) of two other TEPCO plants. Rolling black outs will continue for another month or so and then the question becomes how much demand peaks in the summer.

Another difference from 1995 is Japan’s much higher debt-to-GDP ratio today. Moody’s Investors Service warned that Japan may face a severe jump in the cost of raising capital as a result, but this ignores the fact that more than 90 percent of Japanese debt is held domestically. Japan will probably be able to increase consumption taxes and highway tolls or issue bonds domestically in order to pay for reconstruction without drying up the domestic savings pool.

The intangible impact on the economy is harder to measure. Japan’s economy has languished for almost two decades. Some leading commentators and politicians in Japan see the current crisis as an opportunity to craft a more dynamic market-oriented economic model. However, other observers worry that Japan might grow addicted again to the old pump-priming Keynesian model.

In part, the country’s future economic strategy will depend on politics. The Japanese government responded to the earthquake and tsunami with a high degree of professionalism, which comes from years of experience with natural disasters. However, the response to the Fukushima nuclear reactor is provoking severe criticism from the press and public.

Quiet betting among political analysts in Tokyo is that Prime Minister Naoto Kan will be pushed out sometime in late summer or early fall. It is not obvious who would replace him. Former Foreign Minister Seiji Maehara was capable and popular, but resigned over a minor fund-raising scandal and may remain in the political wilderness a short time longer. Chief Cabinet Secretary Yukio Edano is considered not yet seasoned enough to take the top job.

Overall, the Democratic Party’s penchant for bashing bureaucrats will be viewed in a more negative light and a new style of leadership - one based on competence and effective governance - will be demanded. That should favor the opposition Liberal Democratic Party, but the public still has a hangover from its five decades of rule and continues to hope for change.

The public’s demand for effective and competent governance will likely rebound to the advantage of the Self Defense Forces (JSDF), which performed with speed and courage after the crisis. Fiscal pressures may prevent the defense budget from going up significantly, but neither will any politician want to cut it after the JSDF proved their worth. Meanwhile, politicians wanting to relax constraints on the role of the JSDF will find increased support in the media and Diet.

The crisis seems likely to reinforce public confidence in the U.S.-Japan alliance. Operation Tomodachi - the search and rescue operation by U.S. forces in Japan - has been the largest U.S.-Japan combined operation ever. Support for the alliance was already at 76 percent in public opinion polls and will only go up. Relations with Korea will also be improved by this crisis. The sympathetic outpouring from Korea was not lost on Japan. Relations with Russia may also move in a better direction because Japan will need LNG and Russia will want to sell it to Japan from Sakhalin.

Changes in Japan-China relations may be more cosmetic. Beijing was looking for an opportunity to soften its image in Japan after the September 2010 confrontation over the Senkaku/Diaoyutai Islands and quickly sent a small rescue team and financial assistance after the earthquake and tsunami. But structural and strategic tensions in Japan-China relations will not change. At most, there may be a return to the pre-Senkaku era when about 66 percent of Japanese said in polls they did not trust China compared with 86 percent after the Senkaku dispute.

Finally, it will be interesting to see whether Japan’s stance towards North Korea changes. One would expect a higher risk aversion with respect to regime change in the North - which would stress Japanese financial and crisis management limits in the current circumstances.

*The writer is a senior advisor at the Center for Strategic and International Studies in Washington, D.C.

By Michael Green