Japan's Economy Post Quake

On May 13th Yoshihiro Murai, governor of the tsunami-stricken prefecture of Miyagi, received an angry petition from the bosses of a co-operative that has long controlled some of the richest fishing grounds off the coast of north-eastern Japan. Their slogan: “We won’t let fishermen be turned into salarymen.” They were responding to his proposal that, in return for money to rebuild their shattered livelihoods, they should let private firms fish in Miyagi’s waters. Mr Murai, a former pilot, was undeterred by their protests, noting that with most of them over 60, the industry risked dying out anyway. Later he told The Economist that deregulation of Miyagi’s coastline should serve as a model for reform nationwide. “There’s always pain when there’s revolution,” he said.

That resolve has become more common since the earthquake and tsunami of March 11th and the subsequent nuclear crisis jolted Japanese citizens’ faith in their country and those who run it. The question now is whether the reformist zeal will stop at the rebuilding of Tohoku, the devastated region in the north-east, or go further, to solve the problems of overcapacity, high public debt and deflation that were plaguing Japan long before the disaster.

The speed of the clear-up is raising hopes that the economy will prove resilient after the initial shock. Industrial production plunged by 15.5% between February and March, a far steeper drop than the previous monthly record of 8.6%, in February 2009 not long after Lehman Brothers’ bankruptcy. Figures this week showed that GDP fell at an annual rate of 3.7% in the first quarter compared with the last three months of 2010, pushing the economy technically back into recession. Moreover, the decline in output in late 2010 was 3% rather than the previous estimate of 1.3%. But private economists are forecasting a pick-up in the second half of the year, which would be a big improvement on what happened after Lehman.

Recovery in stricken Tohoku has been quicker than many had expected. Nine out of ten manufacturing firms damaged by the disaster hope to restore output to pre-crisis levels by mid-summer, the government says. After a heroic effort by Renesas Electronics, a quake-damaged chip company whose microcontrollers are vital for running many cars, hard-hit Toyota is now expecting to be back to normal production by the autumn.

Electricity supply in Tokyo, thrown into chaos after the Fukushima Dai-ichi nuclear plant and other generators were knocked out by the quake and tsunami, is also being restored, which will further boost the revival. There have been no blackouts since March 29th. Tokyo Electric Power (TEPCO), the utility that owns the Fukushima plant, expects peak capacity to reach 55-56 gigawatts this summer, enough for a small surplus if it is not too hot.

Beyond Tokyo, doubts linger over possible losses of power during the summer because only 19 of the country’s 54 nuclear reactors are in service. Many of those closed for routine maintenance require approval from local governors to be restarted, but with the Fukushima accident still so fresh in people’s minds, it is touch and go whether they will get it. However, companies and households have shown a willingness to curb demand during peak hours, which the government hopes will ward off blackouts.

Another bright spot is that consumers may be perking up. Although there was a record plunge in confidence in April, the “Golden Week” holiday in early May produced an unexpected flurry of tourism. “It is the first time I have been happy in a traffic jam,” quipped Masaaki Kanno, chief economist at J.P. Morgan in Tokyo.

But if the private sector is putting its back into reconstruction, the public sector is being less heroic. The government has passed a ¥4 trillion ($50 billion) supplementary budget for cleaning up the debris and other urgent tasks. But there is a political tug-of-war over a proposal to spend an extra ¥10 trillion on reconstructing and revitalising Tohoku, a lagging region even before the disaster. That public spending will be vital to ensure a strong rebound in the national economy.

Even if Naoto Kan’s government, which suffers from low poll ratings and divisions in parliament, can prevail on the extra budget, there are doubts about whether his leadership is strong enough to shake the economy out of two decades of low growth and rising debt. On May 17th the prime minister postponed a decision on whether to join talks to form a free-trade area called the Trans-Pacific Partnership. That was aimed at reducing the loss of manufacturing jobs to Asia, which is hollowing out Japan’s industrial base and sapping tax revenues.

Another worry is whether Mr Kan can push through a reform of the fiscal system to help ease strains on the public finances. Polls show that the appetite for raising the consumption tax to help share the burden of reconstruction, which was strong shortly after the crisis, is now waning.

Despite these doubts about the politics of reform, Mr Murai is not alone in calling for a decisive break with the past. Within the Ministry of Economy, Trade and Industry (METI), revised growth plans are being prepared that an official says would enable small power-producers to increase their contribution to the grid, encourage more renewable energy and introduce smart metering to stimulate conservation. Officials believe that a focus on green technologies could give new impetus to Japan’s economy. Some think TEPCO should be put through bankruptcy while at the same time Tokyo’s energy market should be opened to more competition. The government has not gone that far but on May 18th Mr Kan hinted that the monopolistic power of electrical utilities might be reviewed, which could lead to the separation of power generation and distribution.

There is, says one METI official, a change of mood. “Before March 11th the goal of Japan was not that clear. Now it’s much clearer.” At present most efforts are being focused on recovering from the disaster. But there is reason to hope that energy may be directed to finding a new way forward for an economy that grows mainly because of foreign trade, generates insufficient demand at home and has been unable to find a productive use for the oodles of spare cash that sits on private balance-sheets.

There is something awe-inspiring about the Japanese on a mission. During Golden Week holidays this month, thousands of volunteers helped to sift through the muddy wreckage left by the March tsunami. Stricken roads, bullet trains and factories have returned to normal with astonishing speed. In people’s ardour to rebuild, once-taboo ideas are emerging on how to reform and deregulate not just the damaged areas but the country at large. The government urgently needs to develop a sense of mission, too.

The combined power of a quake, tsunami and full-scale nuclear accident has jolted whatever sense of complacency the Japanese had about the resilience of their country. The ham-fisted efforts of Tokyo Electric Power (TEPCO) to stem the crisis at the Fukushima Dai-ichi nuclear-power plant have exposed the company for what it is: an inept monopoly so big it could co-opt or run rings around its regulators. It should be broken up. Meanwhile, the smashed-up fishing fleets and sea-swamped rice paddies in the north-east have prompted discussion on bringing private investment into these heavily protected areas which no longer provide a future for the young. Many are championing the idea of special economic zones in the north-east, which would free the area from the cat’s cradle of rules imposed from Tokyo that hamper free enterprise. All of these are good ideas. But they will wither unless the central government throws its weight squarely behind them.

For much of the crisis, Naoto Kan, the prime minister, has been a sadly withdrawn figure. Yet when he does show leadership, the public responds. His popularity, though low, rose this month after he unexpectedly pressed for the closure of the nuclear-power plant nearest to Tokyo because it sits on a fault line. He has won plaudits for suspending plans to build more nuclear facilities. No doubt he could do more to accelerate an emergency ¥10 trillion ($123 billion) plan for rebuilding damaged parts of the Tohoku region if he were not faced by a “Bring Down Kan” campaign within the opposition and even his own party. But he must get around such pettiness.

Carpe Diet

To do so, Mr Kan needs to craft a message as substantial as the challenges Tohoku faces. And he needs debate on it to ring out beyond the corridors of power. There are a few encouraging signs. As TEPCO’s compensation liabilities mount, Mr Kan is airing the once-unthinkable suggestion that it should be broken up. The government may end up on the hook for many of its liabilities, but a break-up could help spur long-overdue deregulation of the energy sector.

More broadly, Mr Kan should seize the national mood of solidarity with Tohoku to persuade people to accept difficult reforms. Higher taxes will be needed not just to pay for reconstruction in Tohoku but also to help shore up Japan’s overstretched social-security system. The pension-eligible age, now nearly 65, may have to be raised sharply, too.

So far, Mr Kan’s message has been muddy. He has backtracked on an idea to enter talks to create a free-trade area known as the Trans-Pacific Partnership, even though the parts-suppliers in Tohoku that have been damaged in the disaster would benefit from freer trade. He has yet to spell out deregulatory proposals that would encourage private companies to invest, in Tohoku and elsewhere.

His excuse is politics: with a divided Diet, it is tough to be bold. But that ignores his ability to harness public opinion for the cause. Not for years have good ideas flowed so freely in Japan. But such moods don’t last. Miss this moment, Mr Kan, and Japan will rue it for years to come.