The tragedy could barely have happened at a worse time for the Japanese economy. After many years of economic stagnation and a stock market which has struggled to retrace back towards its 1989 high of 38,957, the global liquidity surge had seen even Japan exhibit some signs of GDP growth and stock market rebound. All of this was derailed at 2.46pm, local time, on March 11. The financial implications of the crisis are only now starting to become clear as business operations and supply chains still struggle to cope with the challenges of rolling power outages and disrupted communications.
Just three weeks before the earthquake the Nikkei had almost broken through the 11,000 level, although it had then been struggling to hold that level as liquidity began to dry up in the global economy. The impact of the natural disaster saw a plunge to 8,227. Although the market briefly broke back above 10,000, it fell back into a holding pattern around the 9,500 level. The Yen, which had been edging gently higher prior to the tsunami was buoyed further by international intervention in the immediate aftermath to a strongest point for the year, before falling back again as the effect of the support efforts wore off. But the Yen has subsequently gradually strengthened back towards the March peak.
The Bank of Japan’s response has been to turn on the liquidity taps in an attempt to kick-start reconstruction efforts. However, in a world where liquidity has been drying up and where ratings agencies doubt Japan’s ability to continue borrowing, this move has been met with scepticism by the markets. Although Japan is both printing and borrowing money right now, comparisons with the stimulatory effect on the Japanese economy of the aftermath of the 1994 Kobe earthquake are misplaced. Japan’s net sovereign debt 17 years ago was only a quarter of today’s level. Gross government debt then stood at a high, but manageable, 80 percent. Today it has breached 200 percent - more than twice the accepted sustainable maximum.
In other words, Japan’s problems following the natural disaster coincide with domestic debt that is reaching its natural limit, and a dramatically worsening global liquidity environment. That is not to say that there will not be further attempts to provide stimulus to the markets - there almost certainly will. However, the risk that these attempts will fail increases every day.
Even now, we continue to see more and more symptoms of this, such as economic growth forecast revisions, rating agency outlook downgrades and reduced guidance by major Japanese corporations such as Toyota. These all point to the underlying disease of an economy mired in debt which is now also burdened with huge rebuilding and social costs in the midst of commercial and economic disruption.
The three month anniversary of the tragedy was marked by protests in Japan. People are not happy at the extent of policy response to the devastation caused. The Japanese government is being blamed in some quarters for failing to take adequate care of tens of thousands of victims. There is also a real danger that, as more time elapses, the extremely positive initial reactions of support by individuals, governments and businesses outside Japan will lose steam as we gradually forget the horrors of 11th March, 2011.
The dignified suffering of the Japanese people along with the selfless response of many volunteers should embarrass all of us, individuals, companies or governments, who have taken our eyes off this particular ball.
The economic can that Japan has kicked down the road for the last 22 years is looking like it will have to be faced up to before too much longer. The human losses in Japan are a tragedy that will be remembered for many years to come. The social and financial impact of Japan finally being forced to take all the unpleasant decisions that it has managed to put off for the last 22 years will also be very hard to forget.