Japan's economic future. Parts 1 to 5

Written by Hugh Ashton Tuesday, 15 March 2011 12:15
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Japan 2.0

I'm writing this, assuming that we will survive the next few days. At the moment, the situation sounds pretty dire. We have nuclear power plants on fire and exploding to the north of one of the most populous metropolises on earth. They are not nuclear explosions, and to my knowledge, no-one has yet died as a direct result of the incidents there. However, there is a risk of a serious radioactive leak which could drift, contaminating Tokyo and Yokohama. What happens then? It's statistical, and it could be very bad. It could be moderately bad. It almost certainly won't be trivial.

But let's assume that the worst doesn't happen, and that the people fighting this succeed in their attempts to limit the damage to a relatively minor area.

We also, of course, have a massive area of the country devastated by one of the most powerful earthquakes and tsunamis ever recorded anywhere, and a death toll that is as yet unknown, but may rise to 10,000 or more. By any measure, this is a colossal blow to any country or society. Power is out in many areas — I'm writing this on an iPad in the middle of a blackout — and this will continue for some time to come.

However, I am still optimistic about the future of Japan. I don't mean to say that we are going to get back to normal in the next few weeks, or even the next few months (I say "we" as a British resident of Japan — I've lived here for more than 20 years, and this is my home and the society I am now part of). It's going to take years to recover to the way we were.

Or will it? First, the Japanese people are amazingly resilient. Earthquakes and large natural disasters are a part of the landscape here. Children are trained from an early age in what to do when the earth starts moving, and there is a long tradition of ingenuity and gaman — grin-and-bear-it toughness. As an example, following a speedy and (I admit it) terrifying flight down seven flights of heaving stairs, with plaster flaking off the cracking walls, and heavy steel emergency doors flapping and clanging all around, I found myself with no way of getting home, in a temporary overnight shelter on the ground floor of a municipal centre, with about 100 or more other people. The staff at this place were incredibly helpful. We were supplied with chairs, tables, and lots of information on buses, trains, etc. One family was enjoying a picnic of rice crackers and strawberries (obviously bought before the quake to take to a home that could not now be reached) and some children were running around smiling at people. At the next table, I noticed some girls playing cards, laughing and smiling, obviously happy and warm, with blankets tucked around their knees. I looked a little closer, and noticed that they had cut up paper and hand-drawn their own miniature playing cards, which they were using for their game. At that moment, I felt better.

[Back again after a real panic attack. The wind is blowing towards us from the reactor area. Radiation levels are high and one reactor contains MOX - including plutonium. I was pretty sure I wasn't going to survive the next day or so. I feel a little better now, but it's still scary out there.]

That card incident really gave me hope, as did the kindness of a friend's husband who gave me and some other friends a lift home - over 5 hours of hellish driving for him. There are many other tales from all over of similar acts of random kindness. People were great.

If we survive this horror (and the real horror is not the earthquake, but the risk of radiation enveloping one of the largest conurbations on earth), then I have hope for a new Japan.

Why? First, let's look at the political response. The Prime Minister, Naoto Kan, has been traditionally perceived (if we can talk about tradition concerning a Prime Minister who has only been in office for about half a year) as rather ineffectual. However, in the first 24 hours after the quake, he was at the stricken nuclear power plant, encouraging and exhorting. He's not a charismatic man at all (I've met him briefly at a public event, and he's not much better in person) but he is the best kind of salaryman – dedicated, hard-working and conscientious. He's not a prima donna to push himself into the limelight, and he doesn't suffer fools gladly. Indeed, when talking to the executives of TEPCO (Tokyo Electric Power Company) who operate the stricken plants, Kyodo news agency reports that he exploded at the executives, "What the hell is going on?" after discovering that they had delayed the report of an explosion to him by an hour. In a nation where the president of even the smallest company is deferentially addressed as "shacho" and his slightest whim is deferred to, this must have come as a rude shock.

He's been decisive: calls for help to foreign experts were fast in coming and local teams were on the ground literally within minutes. Health care can be obtained for victims without cards, tax refunds are available, short-selling has been banned on the stock exchanges, the Bank of Japan has made trillions of yen available to help liquidity, consumer bank accounts can be used without the usual mandatory ID, and so on. And all this happened over a weekend, with no lengthy meetings or bureaucratic hurdles placed in the way. A far cry from the Kobe earthquake of 1995, where foreign aid was turned away, and responses were delayed and inadequate.

The public announcements have been clear and comprehensible, and though we are sure there is some whitewashing going on, the general feeling is that we are largely being told the truth. Yukio Edano, the chief Cabinet Secretary who speaks at press conferences, has become a sort of folk hero, cheered on and encouraged by Twitter messages telling him to take care of himself and so on.

And with all this, I feel there is hope for a Japan 2.0 when we come out on the other side.


To be continued

Another day, another quake

Last night as we were going to sleep, we were rattled out of bed (futon) by the quake, which turned out to be quite serious. We've given up worrying about the little ones. We rushed to the front door in pyjamas, where we have our emergency kit of some food, water, clothes, torches, radio, etc. all ready to go. We threw open the door, which is recommended procedure in case the frame of the building warps, preventing doors and windows from being opened. As it turned out, this precaution was unnecessary, but we slept in our clothes, ready for a repeat performance.

I described a fictional account of this quake and an attendant nuclear accident in the first draft (later replacing this plot driver with the Lehman catastrophe). The section is now available for free download, and you can make a donation to quake relief if you like, from: There are some interesting predictions in there.

We are without power again this morning. We had little warning of this, but we had some announcement over our municipal public announcement system. Every neighbourhood has independently powered speaker systems that are used for emergencies, warnings, etc. Sometimes irritating, but the system is there – and it works. When the big earthquake hit on Friday, my wife was sketching near the coastline. Within minutes of the quake, sirens sounded, and the speakers told people to evacuate to higher ground to avoid a potential tsunami.

And this is typical of Japan.

The worst is expected, and prepared for ... most of the time, at least. Of the hundreds of trains that were running at the time the quake hit, the only deaths or indeed accident that occurred was at the place where a train was hit by a tsunami. In Tokyo and Yokohama, where the quake hit pretty badly, and electricity suddenly went out in the world's most high-tech cities, fewer than 10 people died as a result of the quake. I mentioned earlier that I went down seven flights of stairs. Why didn't I take the lift? Because in Japan all lifts are programmed to respond to excessive vibration by travelling to the nearest floor, opening the doors and stopping operation. The area where this preparedness (which is where all the attention is being focussed) is the operation of the nuclear plants.

In this case, although there were emergency measures to keep the cooling going (batteries, emergency generators, etc.) and they were in place, and working, there were some fundamental design flaws. One of these was, of course, the siting of the generators. Note that the earthquake preparedness seemed to work well – all plants stayed intact, shut down on cue, and the batteries and generators worked as advertised. That's pretty good for a 40-year-old reactor which was designed to withstand a magnitude 7 quake, and was hit by a magnitude 9 (I think I'm right about the design strength). In any case, it was massively over-engineered. There hadn't been enough thought given to the siting of the generators, though. And let's face it, a 10-meter tsunami is something that you really don't expect to happen, even in Japan. But yes, it was a stupid design decision.

The point here, though, is that Japan basically continued to function. The precautions put in place worked. Even in the horribly devastated areas, many buildings survived a once-in-several-lifetimes intensity jolt. We live with disaster round the corner. If I walk a few hundred yards, I see a large volcano that last erupted a mere 300 years ago (Fuji-san). Walking a mile or so, I come across the Kamakura Great Buddha, standing outside, because his temple was washed away by a tsunami 500 years ago. The same earthquake turned a freshwater lagoon into a brackish lake (10th largest in Japan) near where I used to live (Hamana-ko). Typhoons and flooding are a regular occurrence in autumn, together with associated landslides. Oh, and we have avalanches in the mountains quite often. So the Japanese build for disaster and prepare for it.

There are some reports from non-Japanese sources that the government is being criticised for its lack of activity, especially with regard to information propagation, but on the whole, the analysis from non-sensationalist sources seems to indicate that Japan is doing the right thing with regard to the earthquake. There are still, however, misleading and sensationalist articles, even in the "quality" overseas press: This links to the comment I made on the article.

[A little side note - someone has just suggested to me that the sensationalism of the Western press is the result of a concerted effort on the part of short-sellers, hoping to trigger a global financial meltdown on the back of this tragedy. If true, this would be appalling. Of course, there is no real way to prove or disprove this.]

Not only do the Japanese prepare for disaster, they actually rebound from the ashes stronger. Let's just look at the Nikkei 225 for a moment as one example of a rebound. Monday and Tuesday, the Nikkei dropped over 1,600 points – closing at the lowest level for nearly two years. What? A country that has just experienced the fourth worst earthquake in recent recorded history, which promises to suffer a 3% fall in GDP to repair the damage caused by the quake and subsequent tsunami (some analysts' estimate) and has just lost large amounts of its electrical power for the foreseeable future drops only that much?

And on Wednesday, today, I see that we're climbing back, slowly but surely. By Friday, if the nuclear problem is visibly and demonstrably under control, and if there have been no more massive aftershocks, we will probably see the Nikkei back to where it was before the quake. But let's ignore the casinos for now – let's look at fixed income. An analyst friend once said that you're not considered a Master of the Universe unless you've lost a billion dollars shorting JGBs (Japanese Government Bonds). But no, the 20-year auction today produced the highest yield for a year. JGB futures were lower today, but it doesn't appear that this was a significant drop.

This is largely because Japanese banks are extremely liquid. Companies continue to save money with banks (even though domestic savings are at a low rate), and the banks continue to buy Japanese bonds (they're not lending it). This, of course, is a key difference between Japan and Greece. The debt is largely internal, and JGB issues are oversubscribed 12 times.

I'm not an economist, but it does seem to me that many fundamentals of Japan Inc. are pretty sound, despite everything and the acknowledged and manifold weaknesses. What flaws there are, are relatively easily remedied, and with this government, it is quite possible that the remedies will come through.

But first, a few of the problems.

  • The aging population, which will result in a shortfall in the workforce
  • Debt (see above)
  • Interest rates at 0% or very little more
  • Loss of 2nd-largest status to China
  • A paralysed bureaucracy and over-regulation
  • An over-protected inefficient agricultural sector
  • A very low tax multiplier

Not all of these have quick fixes, but I intend to go into them a little more in the next part of this, together with some of the less obvious social problems and the associated fixes, that may only occur to those living here.


To be continued

Looking at the problems

I took a day off from this writing. While there is no power and the Internet is intermittent, it seems like a good time to tidy the crud off my desk.

But we appear to be relatively stable right now, as far as the geological situation is concerned. There was a nasty moment last night – happily, we'd decided not to take a bath that evening – if there is one thing worse than having to leave the house on a cold night, it's having to leave the house on a cold night when you're dripping wet and naked. However, we didn't have to leave, but another rather nasty quake all the same. The little ones don't get noticed so much. We look up, feel to judge if it's going to be serious, shrug, and move on. What else can we do?

At the same time, there is a sense of stress. We don't know what the situation is at the Fukushima power plants – largely because no-one knows in detail. They can’t even, as of this time, determine the geometry of the exterior building that has been damaged.

So, to rebuilding the economy. Even if the worst happens, as I wrote earlier, the consensus seems to be that Tokyo will not be affected. The British FCO, as of now, is saying that if the worst comes to the worst, those of us further south should probably stay indoors as much as possible. And that means we'll be working.

Some bits of Japan are definitely not working, though. I do realise that supplying electricity to a major urbanised industrial country is a little more than a simple matter of flicking switches and resetting breakers, but TEPCO (Tokyo Electric Power Company) have made a mess of the blackout schedules. It's proved impossible to plan, even though we have been given schedules, these may change suddenly without much warning.

Another conspicuous failure is Mizuho Bank, the megabank which created a stir when its computer systems from three different vendors failed to amalgamate properly following the corporate merger. It appears they still have problems. Well over 1,000,000 settlements remain outstanding, and 620,000 monthly salaries will not be paid. The President's excuse: "some of our systems are still a bit tangled"! The cause may be an influx of foreign currency donations.

And, speaking of which, the fact that the yen hit the high 70s the other day is a real sign of confidence in Japan by those companies buying yen to rebuild for the future. Of course, a strong yen is bad for the exporters, and exports are Japan's lifeblood, so there has been intervention, and the forex tables at the casino have gone somewhat quieter.

But now I want to turn to some of the issues I mentioned previously:

Aging population and shortfall in workforce

Well, for a start, there is going to be a massive demand for labour in the rebuilding of the devastated area. It won't be long-term, but it is a chance to "start from zero" in that area, as both Japan and Germany had after the war, and it is an opportunity to rebuild not only the towns and communities, but also the industries and employment opportunities, in a way that better meet Japan's current demographic and social needs.

The other major industry that will almost certainly experience major growth will be the renewable energy industry. Japan already has a lead in many sectors here, and the almost inevitable backlash against nuclear energy and the way it is run will spur development of new technologies. As with many Japanese innovations, once the basic R&D is complete, it will spawn a production industry to put into practice the ideas coming out of the labs, at least until China can start making cheaper copies. But for a few years, I think we will see a large amount of investment in alternative and complementary energy source. The initiatives may not always come from the big conglomerates: Hitachi, NEC, etc. but may end up coming from the smaller "unknowns", of which there are many (think Nichia and blue LEDs).

Debt and interest

I talked a little about debt earlier, but really, Japanese corporate debt is virtually non-existent. Profits are stored in the bank, at low rates of interest, or used to buy JGBs. It's probably a fair bet that interest rates will go up as the result of increased demand for liquidity by companies seeking to rebuild, and higher interest rates may well tease some of the home savings of those relatively unaffected by the quake out from the tansu (wardrobe – the equivalent of under the mattress), and this will help to provide more money to rebuild. In the long term, this investment and extra employment will probably help to push up consumer spending and confidence.

And sorry, that's all I have time for right now. We have a power cut scheduled soon, and I need to prepare.

Light at the end of the tunnel?

Maybe it's a bit premature to talk about this, as the work at the atomic plants goes on slowly but surely. The really good news is that 2 reactors (5 and 6) are now reported in a cool shutdown state, and that all 6 spent fuel ponds have temperatures of less than 100C. I've just read a Reuters story that we now have electricity connected to all 6 reactors, so pumping cooling water may start very soon. We're not out of the woods yet, but getting there, it seems.

The British Embassy is distributing potassium iodide tablets, just in case. I haven't picked mine up yet, and I may not even bother. It does seem that the worst case wouldn't harm us here, a little south of Tokyo, but of course, there is no guarantee of anything. The press (including the Japanese press, to a certain extent), has had a field day with the "radioactive spinach" and the excess iodine discovered in some water. These are things that can be and are checked by independent observers, and I have little reason to doubt the government when it says these are safe. Unfortunately, there are those who can't or won't read past the headline saying "Spinach found with 27 times legal radioactivity". That's true, but the legal limit is so low that even at 27 times the legal limit, it's been worked out that an adult would have to eat 1kg/day for a year to reach 1/2 the level of a CT scan.

The real story is really the hundreds of thousands who are homeless, cold and hungry. They're far less photogenic and newsworthy than the stricken reactors, and not nearly as scary as radioactive vegetables, but the human cost is much more. On the whole, Japanese people seem to have been behaving extremely well. Virtually no looting has been reported (not none, but almost none), and I have heard unconfirmed reports of violence and sexual assault in some of the shelters. With a population of well over 300,000 people sheltering, it would be news if all were saints, quite frankly. But help is still needed for these people, and donations are being accepted by many reputable agencies.

The logistics of getting the aid to the people who need it are terrible, of course. Japanese country roads are slow and torturous to drive along at the best of times. When torn up by earthquakes and landslides, they are impossible, and some of the villages in the quake-hit region really are unreachable. But things are getting done, and help is getting through, despite everything.

But this really indicates one of Japan's real problems, not just a perceived one – the agricultural sector. Agriculture

After the war, the American occupying forces (SCAP), with the greatest of good intentions, smashed the old landlord system, whereby a relative handful (under 30,000, according to some authorities) of landlords owned the land in Japan, and distributed it to those people who had been renting it and working it. The result was a predictable mess of tiny kitchen gardens in most parts of the country. Even at their largest, farms in mainland Honshu are pathetically small compared to North American or European farms (Hokkaido, the northernmost island, is different).

These tiny "farms" are hardly economic, and rice production is heavily subsidised to the point where Japanese consumers pay seven times the world market price for the staple. Rice is highly labour-intensive, but the Japanese have created a whole market of miniature rice planters and harvesters to assist farmers with the work. The whole patchwork is overseen by a network of agricultural cooperatives (nokyo) that act to distribute seeds, etc. and collect and market the produce. On the whole, a beneficial, if inefficient system. In the winter, when farming is not possible, much of the agricultural labour pool often either migrates to the cities to work as unskilled or semi-skilled labour on construction sites, etc. or engages in government-sponsored "bridge to nowhere" projects.

This nokyo system does, however, create a large centralized cash pool, and the central agricultural bank (Norinchukin) made use of it in the past, buying up large quantities of subprime-backed securities, long after they had passed their sell-by date, according to some commentators. There may be trouble on the way for the farmers of the stricken areas – not enough money to get things back the way they were.

Or, we might ask, should things be put back to the way they were? In common with most developed countries, Japan has seen a flight from the country to the town by the younger generation. Those remaining may well be too old and dispirited to try to pick up the pieces and carry on as they were. This may actually be a very good time to think of revitalising the agricultural business of Japan, at least in this area to start with.

This coincides with PM Kan's expressed wish (before all of this) to reform agriculture and allow commercial interests to undertake farming activities (currently illegal) as well as joining the Trans-Pacific Partnership (TPP), which would eliminate the tariffs on, among other things, imported rice. It may be that the devastation around the quake regions will be enough to force these changes through.

Though immediately prior to the quake the Asian market for "luxury" Japanese produce was starting to take off, the recent discovery of (very low levels of) radioactivity on some vegetables means that Japan will have to assure its neighbours of the safety of these products, as well as on dairy products (Japanese milk used to fly off the shelves of Beijing convenience stores, despite being six times the price of the local product). Of course, some of the reports are ludicrous – the account of radioactivity being discovered by Taiwan in produce from Kagoshima at the southern tip of Japan would imply, if the radioactivity is assumed to come from the reactors, a constant wind speed of 130km/hr for 10 hours or so. I can assure you, living under the path of such a suppose wind, that this has not been the case!

So this is one option for Kan: push forward with membership of the TPP, presenting it as a necessary measure to safeguard the supply of affordable food to the Japanese people, while simultaneously working towards a more "industrial" and realistic agricultural policy, with manpower supplied by the younger generation, many of whom would probably welcome the chance to partake in modern farming, rather than the antiquated methods often employed now. There is probably enough common-sense and respect for both the land and the food produced for Japan to avoid the excesses of Western factory farming, while still maintaining a level of efficiency that would aid Japan's recovery in many ways, not least, that of morale.

The whole question of Japanese agriculture is a thorny one, and this briefly skims the surface. However, it seems to me that there are many positives that can result from the current disaster in this field. It will be interesting to see if Kan can take the bull by the horns here.

Moving on to the future... (a non-economist's ideas)

Woke up this morning with a half-formed (and maybe half-baked) idea running through my head, which may or may not make sense. I'm not an economist, and the situation is probably more complex than I imagine, but I really think I have a few good ideas here.

Japanese regions and municipalities are going to need a lot of money to rebuild themselves in whatever form the rebuilding takes – either an "as you were" configuration, or as a new kind of structure. Though there is a lot of debt, as mentioned previously, overall Japanese assets exceed liabilities, and the vast majority of the liability is held onshore, so many claim there is not so much risk associated with the perceived high levels as might initially appear.

There's going to be a renewed demand for fossil fuels in the future. Rightly or wrongly, the Fukushima disaster has made people leery of future nuclear power developments. Renewable sources are still some way away from mass deployment, and the only alternative for a while at least will be fossil fuels. For Japan, this typically means imported oil and natural gas to satisfy this very energy-hungry nation's demands.

So that means that the price of oil will skyrocket – I'm not going to try to give a price per barrel, especially as prices may not even be quoted in dollars in the future.

And that's the other part of the equation. With the real appreciation in the yen, as Japanese companies buy back their own currency to prepare for rebuilding, the yen is an extremely strong currency right now - maybe the petrocurrency will change to be a basket including the yen. Whatever, interest rates will almost certainly rise, as the banks start to unload their liquidity into the debt market, and Japan will become a pretty attractive place for investment.

So, what will we have? A whole load of hard money going to oil-rich countries, and a very potentially bullish debt market. My instant solution: Japanese municipalities should start looking at issuing municipal sukuk (shariah-compliant debt instruments), denominated in yen. It is almost certain that Japanese institutions will have little experience in this field, and it will be necessary for foreign firms with this kind of knowledge to make things work in this area.

The combination of a strong yen flowing into economies needing specialised financial investment instruments, together with a highly creditworthy potential debtor's need for money, makes for a unique market opportunity offered to any firms willing to take on the task of bookrunner here.


I want to move on briefly to the bureaucracy and its effects on Japan. The country has sometimes been compared to the Brezhnev-era USSR, in that a single party held power for far too long, and a culture of complacency, and at times corruption, permeated the government structure, which extended micro-management control over many areas of commercial life where such control would not be expected. Of course, there are no secret police or gulags in Japan, and this comparison is in no way intended to imply that Japan is in any way a police state.

A real efficiency-blocker was the practice of amakudari (literally "descent from heaven") whereby senior civil servants retired and parachuted safely into a senior position in the private industry they were previously regulating. Rewarded with salaries and pensions in these posts for the favours they had previously granted to the industries, this resulted in a lot of blind eye-turning to egregious systemic faults in organizations and methods, as well as measures to protect domestic firms through a multiplicity of seemingly random regulations which often confused and discouraged foreign competitors. The failures at TEPCO (which in many ways resembles a quango rather than a commercial operation) prior to the recent disaster regarding the reporting of nuclear incidents and failures to meet standards are outcomes of this kind of attitude. Although the currently governing DPJ has made efforts to eradicate this practice, there is strong opposition (not unnaturally) from the civil servants, who voice their opposition through their tame mouthpieces in the Diet (parliament). Indeed, some of these bureaucrats often find safe seats in the upper house here (the upper house in Japan is sometimes often used as a training ground for junior politicians or for showpiece party members, rather than a place for superannuated pols to retire). Elected politicians were traditionally simply seen as mouthpieces for the various ministries they nominally oversaw (think of the TV series Yes, Minister, but magnified by a large factor).

We can't expect to see whole ministries dismantled overnight, of course, but I am reasonably confident that much of their power will be stripped away - but this is to a large extent dependent on public assessment of the politicians involved in the crisis management, following the settling of the dust, and this in turn largely depends on the eventual outcome.

My view, and that of many others I know, is that Kan has naturally fallen short of perfection in his handling of the crisis, but he is far and away better than any Prime Minister or government that Japan has had over the past few years. I can’t think of any current politician who would have done better. As an example, the leader of the opposition Liberal Democratic Party (in opposition for nearly the first time in over 55 years) was invited to join the Cabinet as vice-Premier in a crisis coalition. He refused, thereby, for me at least, destroying any credibility he may have in his claims to be representing the interests of the country.

Already the government here has moved with remarkable speed, given the usual glacial pace of Japanese politics, and it is the elected politicians, rather than the Vice Ministers (Permanent Under-Secretaries) who have largely been at the podium talking to the public. The voters' opinions have yet to be heard, but given even only moderate efforts by the DPJ, they should be able to boost their flagging approval rate following the immediate crisis. There are, of course, complaints that not enough has been done, or that the wrong things have been done, or that the right things have been done too late. Given the triple nature and the extent of the catastrophe, I am more than willing to cut those in authority a little slack. In many cases, I am sure that the correct information has not been relayed to the public, simply because it has not been available to anyone. No-one criticising the government, or indeed reading this article has ever been in a darkened damaged reactor area, trying to assess the level of a damaged complex system while wearing heavy protective clothing, and while the area is rocked by a constant series of aftershocks. I can't even begin to imagine what it is like for these brave people.

Right now, though, in the wake of the nuclear disaster, and with the seeming inability of TEPCO to provide timely accurate information, together with the seeming inability of the regulatory authorities to control the rogue utility will, I think, lead to a further backlash against what many here see as a bloated ineffectual parasite existing on taxpayers' money (TEPCO) as well as the bureaucrats who are meant to have controlled them. Maybe this is wishful thinking on my part, but a small revolution may be on the cards, where the DPJ's expressed aim of having the politicians, rather than the career bureaucrats, calling the shots becomes a reality.


Last modified on Saturday, 26 March 2011 12:35

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