Issue of the week: Japan’s disaster and the economy

last updated 8 January 2015

Northeastern Japan’s battered landscape looks like the end of the world, said Binyamin Appelbaum in The New York Times. But we often overestimate the economic impact of disasters “because of our tendency to generalize from devastating images and anecdotes.” In fact, the economies of Japan and the rest of the world are likely to shake off the effects of the crisis in a year or less. Even very large disasters often have surprisingly light impact on economic growth. This one could act as a “savage stimulus” to generate furious reconstruction activity and rouse Japan from its two-decade-long doldrums. That’s possible, said Rick Newman in USNews.com. But only if Japan gets those damaged nuclear reactors under control and restores the nationwide electrical power grid. An extended impairment of the grid could “derail Japan’s industrial economy” and have a telling impact on the global economy.

That’s putting it too mildly, said Sean O’Grady in the London Independent. A nuclear meltdown would “trigger an economic meltdown.” Not only would it deal a “grievous and permanent blow to Japan’s already fragile prospects for growth,” it would cripple business and consumer confidence around the world. “Giants such as Toyota provide jobs and investment globally,” and if they can’t operate at full capacity for a lengthy period of time, global growth rates could slow. Japan’s indebtedness will hinder any recovery, said Elizabeth MacDonald in FoxBusinessâ€‹.com. “Japan desperately needs capital for its recovery efforts,” and it is unlikely to find all it needs in its once-enormous pool of consumer savings. The country’s millions of retirees have already stopped saving and started spending, and they may need to step up their withdrawals even further “in this time of crisis.” If so, then Japan will either need to borrow on world markets—which will charge a premium to lend to a country that has “committed hara-kiri” by allowing its public debt to climb to twice its GDP—or sell some of its $882 billion in U.S. Treasury bonds. Either course will drive global interest rates up and growth down.

That’s why those who say this disaster could be an economic blessing in disguise have fallen victim to a “fallacy,” said Art Carden in Forbes.com. “Destruction is not production.” The capital invested in Japan’s rebuilding is capital that can’t be invested in more valuable and productive enterprises. And it won’t do to argue that “there is more to life than wealth.” Wealth is what “shields us from nature’s fury.” Less of it, whether destroyed by nature or taxed by government, leaves us less safe and less able to enjoy life.