Wednesday, March 23, 2011

Japan Crisis: Can the Phoenix resurrect itself from the ashes?

Trodden houses scattered over ‘wasteland’, bodies washed away and nothing but debris all around. That is all that physically remains of Rikuzentakata, a town that once held more than 23,000 people. It started with a massive earthquake measuring 9.0 on the afternoon of March 11th. It is the largest earthquake in history of Japan – equivalent in power to 30,000 Hiroshimas. As the quake lifted the ocean floor, it triggered an enormous tsunami that ripped apart with ease some of what were considered to be Japan’s best coastal defences. The damage has been immense with more than 16,000 people are feared dead and about half a million people are in emergency shelters reeling through a bitterly cold snowstorm. Transport infrastructures including roadways, railways and airways have also been demolished and survivors are facing excessive shortage of food, petrol and electricity.
The plight of the people has been aggravated by another mounting concern: that of a meltdown in the damaged nuclear power plant at Fukushima Daiichi. Although three of the six nuclear reactors were offline for maintenance and were assumed not to pose any major problems, some of the spent fuel was still in the storage ponds. The tsunami led to an explosion in the nuclear power plant leading to a fire at unit 4 which was accompanied with rise in the radiation levels and this raised the suspicion that spent fuel must have been involved. Left on their own, spent fuel rods would eventually boil their ponds dry and then react with air and start melting generating radioactive emissions. The radiation levels have increased and the region within 30 km radius of the plant has been evacuated.

Economic impact of the calamity

With the interest rates almost touching zero percent and growth at a standstill for more than a decade, it cannot get any worse for Japan. Although the extent of damage from the tsunami is not completely known, experts estimate that cost of rebuilding homes, factories, bridges and roads and getting the supply chain in place could be as high as $200 billion. Apart from these direct costs, the harm to the world economy (let alone the Japanese economy) could be huge. Japanese majors such as Toyota, Hitachi and Sony have shut down their manufacturing facilities for at least another week. If the danger of the radiation persists, many businesses might shut down their facilities which would deter investments and eventually hamper the rebuilding and hurt the exports.
The nervous mood has already created a financial upheaval which is evident from the fact that Japanese market plummeted 10% in a single day and 16% overall - the worst two day fall since 1987. It was not only the Japanese markets that suffered the blow, but even the U.S, Asian and European markets were under pressure with stocks down by at least one percent after the crisis. As per the latest IMF projections, if the growth in Japan flattens, there will be a 0.1% decline in the global growth rate. Moreover, the fiscal deficit of Japan would rise further to manage the export infrastructure which has been badly damaged. Even if the nuclear accident is brought under control, the nuclear dilemma concerned with safety will have a huge impact on the nuclear industry as a whole.

A ray of hope                                                                                   

It is said that “The economic impact of a natural disaster is often short lived. But would this be the case with Japan?” It is not the first time Japan is going through such dire circumstances. There have been severe calamities earlier as well, be it the great Kanto earthquake in 1923 or dropping of the atom bombs during the Second World War or the Kobe earthquake. However, every time a disaster has struck Japan, the zeal to come back has been remarkable. Japan spent huge sums of money in using shock resistant construction methods, raising public awareness on disaster management and new earthquake system after the Kobe earthquake. An early-warning system was launched by the Japan Meteorological Agency in October 2007. It provides brief advance warning by television and radio before the earthquake actually strikes. A warning was issued shortly before the earthquake struck Japan on March 11. It is believed that the damage caused by the earthquake is far less both in terms of lives lost and economic impact due to the proactive measures taken by the Japanese government.  
Although disaster does not stimulate the economy but in the year when the Kobe quake happened, the Japanese economy grew by 1.9 % as opposed to 0.9% in the previous year. Moreover, Bank of Japan has injected $180 billion to stabilize the economy after which the IMF said that Japan won’t need its help as it has adequate financial means to get through the disaster.  So, there is a hope that this terrible event will not cause a long lasting impact on the Japanese economy. The impact might be visible in the short run with a few percentage point dip in their GDP but in the long run, after the healing and rebuilding starts, it may bounce back strongly. Reconstruction will provide business for builders and producers of capital goods which might offset some of the negative impact of drop in the output.
The amount of discipline and resilience Japan has showed during the crisis has been tremendous. There have been no instances of looting and the people have not created much of a panic which highlights their strong determination. Japanese people should look at this catastrophe not as a time of grief and mourning but as a time of rebirth.



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