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March 20, 2011

Why Japan Can Avoid Nuclear and Economic Disasters

Takahiro Miyao  (Emeritus Professor, University of Tsukuba, Japan and Visiting Professor of Economics, University of Southern California, USA)
(March 20, 2011: Do not quote without permission)

There has been a striking discrepancy among outside views of Japan's current crisis and future prospects following the trio of major disasters that it confronted in the past week. Following the 9.0 giant earthquake, the destructive tsunami wave and the nuclear plant emergency, the foreign media, particularly those from Western countries, have painted an apocalyptic picture about Japan's condition, especially its nuclear crisis. Many reporters and commentators have questioned the ability of Japan to deal with the current crisis and its political, social and economic fallout. Some have even suggested that this could be a last straw to the already weak economy and society, and lead Japan into secular decline, if not a collapse.

In contrast, however, the financial markets paint a very different picture. Foreign investors have been buying rather than selling Japanese currency and securities. Indeed, after the initial sharp decline in the Tokyo stock market on the first working day following the massive earthquake, share values have increased significantly. Strikingly, it actually took cooperative interventions of the G7 nations in the foreign exchange market to fend off speculative buying of the yen.

What is the reason for this sharp contrast? What do foreign investors know that the media people don't? Here are some basic facts, which are crucially important but have not been clearly reported by the foreign media.

First, the nuclear plant problem in Fukushima is fundamentally different from the case of the Chernobyl meltdown. It might even be said that the worst is already over in Japan, because all the nuclear reactors in Fukushima were completely shut down immediately after the March 11 earthquake thanks to automatic safety devices, unlike the Chernobyl disaster, where reactors were not shut down and actually exploded. So, the current problem in Fukushima is not how to prevent a possible nuclear explosion like Chernobyl, but how to cool down the inactive reactors containing the still hot nuclear cores as well as the spent fuel rods in the pools in order to prevent radioactive materials from being exposed to the open air, which might happen if no cooling system works. So far the Japanese authorities have been successful in buying time with their efforts to inject and spray water in and around the reactors and the pools, as the radioactive materials are gradually cooling over time, since they are no longer active. Although there are official reports that some nuclear materials have been exposed to the atmosphere due to a compromised container, the nuclear radiation level has so far been minimized under the circumstances.

Second, the damage to the Japanese economy seems far less than expected by those who predicted the decline or even collapse of the economy. A good reference point is the damage caused by the Great Hanshin earthquake of 1995 which was recorded at a magnitude of about 7.0 and which led to a death toll of about 6,500. In contrast, the earthquake this time was recorded at about 9.0, and may lead to a death toll that reaches 18,000. From these gross figures, a reasonable projection of the economic damage to Japan's economy could then be perhaps two to three times that of the Great Hanshin earthquake. For the earlier case, the official estimate of the economic cost, made by the Hyogo prefectural government in Japan, is about 10 trillion yen (US$120 billion). One might suggest, therefore, that the total economic cost of the recent, massive earthquake could be as high as 30 trillion yen, a figure that is twice the value estimated by most major think tanks in Japan and the US. However, even this level is equal to only about 6% of Japan's GDP, and is less than 3% of the total value of the financial assets held by Japanese households as a whole. Such costs, while substantial, are hardly likely to lead to economic stagnation, let alone a collapse of the Japanese economy. We should be reminded that Japan's "lost decade" of the 1990s was brought about by a huge loss of asset values up to 200% of the nation's GDP.

A possible explanation for the divergent views of media reporters and investors is that the latter know, or at least sense, these facts and prospects, and are betting that Japan will recover quickly from the current crisis, and even possibly emerge stronger than before if the government adopts sufficiently stimulative reconstruction policies. In this connection, regarding the yen's rise, some economists and analysts believe that speculators may be buying the yen by expecting Japanese investors, especially insurance companies, to sell their assets overseas and buy the yen in order to cover their losses and to take care of their clients' claims in the case of insurance companies. However, most speculators are smart investors who know better than that and probably anticipate a rather rapid recovery of the Japanese economy. The Western media should pay greater attention to these market signals in assessing Japan's ability to handle and overcome the current crisis.