Shots by an out-of-town TV crew of the Sendai train station, with the "bullet train" shinkansen tracks covered with rubble and a new train undergoing a test run still derailed a few miles away, highlight the damage of the quake away from the coast. It will be a long time before that train runs again. But they also highlight what wasn't rendered inoperable, the road network. Some places require detours, and it's slow going, but it goes. As a modern society, Japan – particularly rural Japan – relies on cars and trucks, not trains. And as a modern society – and not a developing country – roads form a network, with multiple routes in and out of all but the most isolated mountain valley or coastal cove. Getting food and emergency supplies in (and refugees out) will be a slow process, but as each day goes by it will be less so. [To track progress, see a map that Honda and Google have jointly created of roads known to be clear.]
As noted in my previous post, Japan's is a large, service-dominated economy, and while the prefectures of the Tohoku and northern Kanto region most affected by the quake have a population of 10 million people (depending on where you draw boundaries), that's in a country of 127 million, separated from Tokyo by a distance similar to that of Boston from New York or Paris to London. Again, depending on boundaries, the share of GDP ranges from 4% to 8%. That's substantial, but even a place as close to the epicenter as downtown Sendai seems to have been spared the specter of collapsed buildings. Stores don't have any way to restock their shelves, but that will happen in due course. As order is built out of the initial chaos, production will resume; the direct impact thereafter will be 1% or less of GDP, and for the country as a whole will be fully offset by expenditures on recovery.
Parts of the Tohoku region may never be rebuilt. One city was totally destroyed by a 1908 tsunami only to be rebuilt behind the supposed safety of a high floodwall; I personally hope people won't bet against another tsunami happening on the same once-a-century schedule. A handful of ghost towns might be a fitting memorial to the victims of the disaster, but are not substantial from the perspective of the economy as a whole.
Back on topic: manufacturing is more interconnected across geography than are services. Automotive News reports that Honda had been unable to reach anyone at several of its suppliers in the regions, sobering but hopefully a reflection of other priorities this past weekend. In any case, between shattered roads and the lack of utilities they aren't going to be producing this next week, so it's better for their staff to focus on cleaning up the random damage of their and their neighbors' homes. All too many workers will have relatives of whom nothing is yet known. Yet a number of factories in the area have already reported "only minor damage," while noting that debris-filled roads, downed power lines and empty gas stations make that moot. [Source: the Japanese-language mag2.com email magazine 自動車ニュース＆コラム that provides a daily summary of published automotive stories.] But surely there is damage at multiple factories, in the auto industry, in semiconductor manufacturing, and elsewhere. That will echo up and down the supply chain. Previous cases (an earthquake in Niigata in 2004 at M7.0, the 1995 earthquake in Kobe at M7.3) suggest most problems will be over the next month even within the region, while most firms have alternate suppliers. This quake has no precedent in size: it's 350 times larger than the Kobe quake, affecting multiple prefectures. So there will be more of an impact. But for goods production, factories were running below capacity in Japan (and in the US and in Europe). To some extent they'll be able to make up for lost output once back in operation – that is, in the interim domestic competitors will gladly pick up the slack. All of that mutes the impact on GDP.
One difference is that infrastructure may be harder to fix; there's too little information to know. Roads are one issue, and they're more important than rail. Ports may or may not need time to be cleared. Natural gas transmission lines, gasoline storage facilities, all that will need fixing. But cell phones are already operating in much of the region, albeit poorly., while in some places people apparently never lost internet access.
Outside the region directly affected by the quake, however, it's electric power that looms large, and its shadow will last longer. In principle utilities elsewhere in Japan ought to be able to pick up the slack; in practice that's not an option because the (unscathed) western half of Japan operates with alternating current at the US-standard 60Hz frequency, while Tokyo and areas further east use the 50Hz European frequency. The grids can't be interconnected. Tepco (Tokyo Electric Power Company) has no chance now of getting permission to restart the reactors that weren't operating at the time of quake, even if they replace the backup generators and other equipment washed away by the tsunami. I've heard nothing of the fate of coal-fired plants in eastern Japan, but if turbines were destroyed they too may remain offline for months. Japan has higher electricity prices than the US (well, almost every country does…) and so factories and offices and households tend to be more sparing in their use than are we. Conservation will be accordingly more costly: they already are relatively efficient in their usage, leaving for example buildings relatively cool in winter and warm in summer. Reliable electric power is the biggest hitch I see to speedy recovery for the economy as a whole.
Let me close by returning to one canard that crops up with some regularity: that Japan as a highly indebted nation can't afford to rebuild. Nonsense.
First, speaking as an economist Japan has a surplus of domestic savings; that's why they have a trade surplus and why Japanese institutional investors have been major purchases of US debt. No one inside Japan wanted to borrow. That will change, but not to the point of making Japan need to turn to the rest of the world for finance. The economy remains mired in deflation; nominal interest rates remain accordingly low, at 1.165% per annum for 10-year bonds – actually down since the earthquake. While at some point deficits will need to be pared, that is a chronic but not yet debilitating problem. With debt issued in yen, its own currency, and held domestically, Japan's case is simply not analogous to that of Greece last year or Thailand in 1997.
Furthermore, those making this claim are making a repugnant ethical judgment: that Japan as a rich county ought not use its resources to help the unfortunate. It is virtually impossible for people to buy insurance against natural disaster: there is too little information for insurance companies to price coverage, indeed they often find it hard to state what the risks are. Governments however can provide such insurance through the tax system.
Japan is not a poor, starving nation that literally cannot mobilize the resources it needs to cover basic needs. Rather it is a rich nation with hundreds of thousands of starving people. It can afford to provide relief, and it can readily raise taxes down the road by an amount commensurate to repay any short-term issuance of debt – it helps that it has extremely low tax rates by international standards.
Now most people making the argument about "too much debt" haven't thought through the implications of what they're saying – that seems to be the case of people approaching the issue from a finance background. But a well-trained economist doesn't have that excuse, we're taught to look behind the facade of jargon and theory to the underlying assumptions of models. If economists make this claim, it's because they don't have the courage to say what they really mean: "tough luck, northern Japan, we don't think the government should do anything to help."
That's not my stance, and I'm thankful that it's not the stance of Japanese politicians. Aid the region they will, and Japanese society will be the better for it – even if taxes have to be raised a tad down the road.
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